Impact of financial systems development on macroeconomic stability in Rwanda

Abstract

Despite the dominant consensus of the positive influence of financial systems development on macroeconomic stability, this link has come under increasing scrutiny in recent years, particularly following the 2007-09 global financial crisis. This study examines this issue in Rwanda to contribute to policymaking in devising appropriate policies for sustaining macroeconomic stability and promoting financial systems development. While the evidence on the effect of financial systems development on macroeconomic stability is mixed in the literature, the results from this study, to a larger extent, support the view that financial systems development has contributed to macroeconomic stability in Rwanda. Results from local projection methods generally suggest that financial system development has contributed to macroeconomic stability, notably on real GDP growth via investment, while the effect on consumption is quasi absent.