The Effect of Financial Development on Inflation Rate in Rwanda

Abstract

A well-developed financial system plays an important role in the economic performance of a country. Thus, the role of financial development and its functions in stimulating economic performance is concrete. However, the economy of Rwanda has experienced an accelerated inflation rate in recent times. The study adopted an ex post facto design to ascertain the effect of financial development on the inflation rate in Rwanda over a period of 12 years. Time series data were collected from 2011-2022. Ordinary Least Squares (OLS) were also adopted. The findings revealed that financial liberalization, domestic credit to the private sector, monetary policy rate, market capitalization, and all share indexes jointly did not influence the inflation rate in Rwanda (Adj.R2 = 14.39%, p = 0.3524 > 0.05, F-stat = 1.3699). The study concluded that financial development did not affect the inflation rate in Rwanda during the period under review. The study recommends that the government of Rwanda should improve on financial development through improving macroeconomic factors such as liberalization of the financial sector and strengthening the channels of credit to the private sector.