Abstract
This study analyzed the asymmetric effects of financial development on economic growth using a model augmented with inflation and government expenditure asymmetries to inform model specification. The research question used entails, Do their asymmetry changes significantly influence growth? Using the nonlinear auto-regressive distributive lag (NARDL), the most significant results posit that positive shocks in financial development in the short run and its negative shocks in the long run increase and decrease economic growth, respectively. Regarding inflation, its positive (negative) shocks in both runs, respectively, reduce (increase) economic growth. In comparison, positive shocks in financial development that spur growth in the short run and negative shocks in financial development (government expenditure) that increase (reduce) growth are the most domineering effects as the rest of the shocks insignificantly affect growth. Results clearly demonstrate to an environment steered by stable and sustainable inflation that regulated government expenditure and comprehensive financial system deepening would positively cause economic growth. Therefore, appropriate policies that favor low inflation and reduced government spending, expansion of feasibly reformed financial institutions, capital accumulation, and increased resource mobilization should be instituted if real growth is to positively happen.
Highlights
The contribution by financial development to economic growth has proven considerably worthy and together with the causalities amid them has too been prudent in understanding the economic growth paradigms
We reach a conclusion that the four macroeconomic variables are mixture stationary without I(2) and proceed for nonlinear auto-regressive distributive lag (NARDL) analysis
This article explored the asymmetric impacts of financial development, government expenditure, and inflation on economic growth in Kenya based on a nonlinear auto-regressive distributed lag (ARDL)
Summary
The contribution by financial development to economic growth has proven considerably worthy and together with the causalities amid them has too been prudent in understanding the economic growth paradigms. Their asymmetric influence on growth is essential because of their significant contributions to specific policy formulation and in case of macroeconomic volatilities. In Kenya, these studies are infrequent, whereas perplexing results have been noted by those that have analyzed the finance–growth nexus and been symmetric To be specific, they have tumbled on the macroeconomic nonlinearities to economic growth. This article investigates how the nonlinearities by financial development affect economic growth using some well-known financial growth indicators
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