The Causal Relationship that exist between Financial Sectors Development And Economic Growth in Ghana

ABSTRACT

This research examines empirically the causal relationship between the development of the financial sector and Ghana's economic growth. In this research findings, data from the Global Financial Development Database (GFDD) and World Development Indicators (WDI) were used. The research employs information from time series data and utilizes a bound test strategy to cointegration within the context of the Autoregressive Distributed Lag (ADRL) to determine the short-term and long-term link between the development of the financial sector and economic growth. Using Unit root analysis to correct non-stationarity as well as using the diagnostic test for determining the robustness of the outcomes, the research discovered that there was a negative connection in Ghana in the short run between private credit by deposit money, broad money growth, domestic credit, inflation and economic growth. There was, however, a positive link between bank deposit, gross capital formation, broad money and economic growth. Trade, however, had no significant influence on financial development. In the long run, with the exception of bank deposits, broad money growth and trade which did not have a significant relationship with economic growth, inflation and domestic credit to private sector had a negative relationship with economic growth whereas the others had a positive relationship with economic growth. There was a uni-directional link between private credit by deposit money, domestic credit to the private sector, trade openness, and economic growth using pairwise granger causality test to ascertain the direction of causality between financial sector development and economic growth, while there was a bi-directional relationship between inflation and economic growth.