Financial Development and Economic Growth in a Post Financial Liberalization Era in Ghana: Does the Measure of Financial Development Matter?

Abstract

This paper investigated the long-run effect of financial sector development on growth in Ghana. The result showed that the sensitivity of financial sector development to growth depends on the choice of proxy for financial sector development. The result showed that ratio of private credit to GDP, ratio of total domestic credit to GDP, ratio of currency to GDP, ratio of currency to broad money and ratio of broad money stock to GDP are statistically significant and negatively affects growth. The result from the indexes created from principal component analysis confirmed the sensitivity of the effect to the choice of proxy. The findings therefore suggest that one will judge financial sector development as having negative or positive effect on growth depending on the choice of indicator as a proxy for financial sector development. The research therefore recommends that policy makers exercise caution in the choice of proxy for financial development in policy design.