The Impact of financial literacy on macroeconomic outcomes in Kenya

Abstract

This study examines the relationship between financial literacy and macroeconomic outcomes in Kenya, specifically on GDP growth, income inequality, inflation, and stock market stability. Despite Kenya’s strides in financial inclusion, a significant gap remains in the analysis of the understanding of financial services and the broader economic impacts the informed decisions drawn from the better understanding have. Utilizing a quantitative approach, the study employs Instrumental Variables (IV) regression models, namely both the Two-Stage Least Squares (2SLS) and Limited Information Maximum Likelihood (LIML). This is to address endogeneity concerns and assess the causal link between financial literacy and key macroeconomic indicators. The results show that financial literacy significantly impacts stock market stability and income inequality but has a minimal direct impact on GDP growth and inflation in the short term. The study concludes by highlighting the importance of financial literacy programs, particularly in reducing income inequality and enhancing market stability. Moreover, the study should offer policy recommendations for integrating financial education into Kenya’s economic framework. Future research should explore the long-term effects of financial literacy and its indirect pathways to economic growth.