ECONOMETRICANALYSISOFFINANCIALMARKETANDECONOMICGROWTHIN RWANDA:A CAUSALITY By TEST

Abstract

This study investigates the relationship between financial markets and economic growth in Rwanda, considering its unique socio-economic conditions and policy environment, evidence from data span started from 1980 to 2022. Using regression models, Granger causality tests, and a Vector Error Correction Model (VECM) analysis, the study reveals significant associations and causal relationships between key variables such as financial market development, government expenditure, price stability, and real GDP growth. The study emphasizes the importance of financial market development in Rwanda's economic growth and the need for sustained efforts to nurture and expand the country's financial markets. It also highlights the positive impact of government expenditure on economic growth, suggesting the need for prudent fiscal policies and efficient resource allocation. The bidirectional causality between financial market development and real GDP growth suggests a potential for a virtuous cycle of economic development. The coefficient of the Financial Institutions in percent change (FI) is statistically significant at the 10% level (*). Hence, we can determine its specific positive effect on economic growth in the context of Rwanda from the available information. The study recommends policymakers prioritize initiatives promoting financial market development, enhancing government spending efficiency, and maintaining price stability, as well as coordinated economic policies and further research to understand these dynamics within Rwanda's unique context.