Effect of Bond Market Development on Growth of Economy Among East African Community Member Countries

Abstract

Effect of financial advancement and growth of the economy have been tested and found to be unidirectional model. This is supported by supply leading hypothesis that demonstrated the need to develop financial markets to achieve real growth of economy. The effect of bond markets on growth of economy exhibit bi-directional model. The above noted empirical findings so far are mixed on the causal direction of bond market development and Growth of economy at the international, regional and local study settings. No study is focused on the EAC financial development for instance bond market. It is conclusive that most of the empirical studies are contradicting in their conclusion over the direction of casual relationship between the development of bond markets and growth in the economy. The study sought to answer the question what id the relationship between bond market development and economic growth in EAC member state. The objectives of the study were Bond market development on growth of economy in EAC member countries, to established relationship between growth of economy and development of the bond market in EAC member countries and to determine Inflation the relationship between bond market and growth of economy in EAC member countries. The Descriptive study has been used to explain the effect of the variables over one another. The population of the study was member states of the East African Community were the population under study. Secondary data was collected for this stud. A number of regression analyses were used in a bid to find out the effect of bond market development of growth of economy within the EAC. The results East Africa Community recorded significant variations in the cost of living between 2009 and 2018. There existed strong variation between (R-value = 0.744) between GDP and bond markets growth in East African Community countries. Further, the study established that bond market development accounts for 51.3% of the total variance of the growth of economy among the EAC member countries. From the results, the study concluded that bond market development impact positively on economic growth in EAC member states. Bond market development lead to growth of economy of the EAC member countries. The study also concludes that bond market development and influences growth of economy of EAC member countries in a positive and statistically significant way while inflation rate, Interest rate, annual exchange rate have a negative and significant effect. The study also concludes that Granger causality exists between growth in the economy and development of the bond market and the causality was bidirectional.From the Granger causality, the study also concludes that annual Inflation rate, annual IR, annual exchange rate and significantly influences growth of economy and the causality is unidirectional. The national government of Kenya through CBK and capital market authority should come up with appropriate financial market regulations aimed at cushioning the economy from adverse effect of macroeconomics variables. The government should also strive to make the bond market attractive to investors who may prefer investment in bonds for longer period of time. In this regard, the government should offer investors attractive and returns on investment. This will attract more investors consequently leading to improvement in growth of economy.