Financial Sector Deepening and Economic Growth in Ghana

Abstract

The purpose of this paper is to examine the effects of Financial Sector Development on Economic Growth in Ghana using the Johansen Co-integration analysis. The paper examines empirically the causal link between financial sector development and economic growth in Ghana. The Johansen Co-integration techniques within a bi-variate vector auto-regressive framework were used for the regression. Using a quarterly time series set of data on Ghana over a ten year period (2000 – 2009), the result of the study shows that, there is a statistically significant positive relationship between the Financial Sector Development and Economic Growth in Ghana. This outcome is in line with the results found for most of the literature reviewed. It is recommended that Government should encourage competition in the financial sector and micro finance development as these will improve and increase outreach and access to credit at a lower cost. This will boost private sector development and investments which is the engine of growth and development. This study will help policy makers in decision making as well as serve as a source of reference for further studies. Further studies are recommended to increase the frontiers of this study. Further research on the role of financial sector developments – following Hasan et al. (2006) – is warranted in order to gain a more conclusive understanding of the finance-growth nexus in a transitional country like Ghana.

Keywords: Financial liberalization Financial market Financial instruments Economic growth Johansen co-integration Unit roots