ECONOMETRIC ANALYSIS OF FINANCIAL MARKET AND ECONOMICGROWTHINRWANDA: A CAUSALITY TEST

Abstract

This study investigates the relationship between financial markets and economicgrowth in Rwanda, considering its unique socio-economic conditions andpolicyenvironment, evidence from data span started from 1980 to 2022. Using regression models, Granger causality tests, and a Vector Error CorrectionModel (VECM) analysis, the study reveals significant associations

andcausal 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'seconomic growth and the need for sustained efforts to nurture and expandthecountry's financial markets. It also highlights the positive impact of governmentexpenditure on economic growth, suggesting the need for prudent fiscal policiesandefficient resource allocation. The bidirectional causality between financial market development and real GDPgrowth suggests a potential for a virtuous cycle of economic development. Thecoefficient of the Financial Institutions in percent change (FI) is statisticallysignificant at the 10% level (*). Hence, we can determine its specific positiveeffecton economic growth in the context of Rwanda from the available information. The study recommends policymakers prioritize initiatives promoting financial marketdevelopment, enhancing government spending efficiency, and maintainingpricestability, as well as coordinated economic policies and further researchtounderstand these dynamics within Rwanda's unique context.