The nexus between financial development and economic growth: empirical evidence from Ghana
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Date
September, 2016
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Abstract
The study examines the nexus between financial development and economic growth in Ghana over the period 1970-2013. The stationarity test result shows that the order of integration of variables included in the model was a mixture of I(0) and I(1). Therefore the study employs the bounds testing approach to cointegration and error correction models developed within the Autoregressive Distributed Lag (ARDL) framework to explore the long-and short-run effects of financial development on economic growth. The study uses five different measure of financial development including, credit to the private sector, narrow money, broad money, ratio of narrow money to broad money and domestic credit. The study also investigates whether there are other determinants of economic growth. Evidence of both long-run relationship and short-run dynamics was found amongst the various financial development indicators and economic growth. Precisely, the results showed that credit to the private sector, ratio of narrow money to broad money, narrow money, broad money and domestic credit influenced economic growth in the long-and short-run. Again, inflation and government consumption expenditure were found to impede economic growth in the long-run and short-run. Contrarily, capital stock, trade openness and FDI were found to stimulate economic growth both the long-and the short-run. When credit to the private sector was used as an indicator for financial development, financial sector liberalisation was positive. The study recommends that policy makers should take caution in the choice of financial development indicator as a policy instrument for the attainment of growth and development. Again on the basis of empirical evidence, policies to improve the accessibility of affordable credit by the private sector, including small and medium scale enterprises should be enforced.
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A Thesis submitted to the Department of Economics of the College of Social Sciences and Humanities, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirement for the award of Master of Science Degree in Economics.