Nicholas M. Odhiambo
Savings and Development Vol. 33(2009), No. 1, pp. 7-25

This study takes a fresh look at the direction of causality between financial development and economic growth in Kenya by examining the impact of inflation on the finance-growth nexus. The empirical results reveal that economic growth Granger-causes financial development in Kenya irrespective of whether the causality is estimated in a bivariate framework or in a trivariate setting. The study, therefore, concludes that the financial sector development in Kenya is largely dependent on the demand for, rather than the supply of, financial services. Other results show that economic growth Granger-causes inflation while inflation Grangercauses financial development in Kenya. The results apply irrespective of whether the causality is estimated in the short run or in the long run.

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