Abstract
There is ample evidence from economic growth literature that investment accelerates economic growth and development of developing countries, of which Ghana is not an exception. Based on this, recent growth and development policies in Ghana have focused more on encouraging private sector investment through the development of the financial sector. This paper investigates the short- and long-run impact of financial development on private investment in Ghana for the years 1970–2014. Additionally, to find out whether the measurement of financial development matters for private investment, several indicators of financial development are used. The results, based on the ARDL bounds testing approach to cointegration, suggest that financial development has not been a key driver of private investment in the long run, while, in the short run, the effect of financial development on private investment depends on how financial development is measured. Given these results, policy makers should be circumspect regarding the choice of financial development indicator used as a policy instrument in the design and implementation of private investment policies for Ghana.
Highlights
Investment has been shown to have a positive significant impact on economic growth (e.g., Khan and Reinhart, 1990 [1]; Hoeffler, 2002 [2]; and Frimpong and Adam, 2010 [3])
Based on the extant literature reviewed on financial development and private investment, we present a model for estimating private investment for Ghana
This paper sought to investigate the long- and short-run impact of financial development on private investment in Ghana by using five proxy measures of financial development, namely, private sector credit to GDP, broad money supply to GDP, deposit money bank assets to GDP, financial system deposit to GDP, and an index of these four indicators constructed by principal component analysis
Summary
Investment has been shown to have a positive significant impact on economic growth (e.g., Khan and Reinhart, 1990 [1]; Hoeffler, 2002 [2]; and Frimpong and Adam, 2010 [3]). The worth of the capital project must be greater than its cost of purchasing and installing by an amount, which is the same as the worth of keeping the investment option awake These uncertainties resulting from financial markets in the form of interest rate volatility, inflation, irreversible nature of investments, and political structures of the country inter alia have specific implications for private sector investment decisions. Developments in the financial sector usually consist of policies that promote effective financial intermediation and markets, prompting the ease with which exchange takes place in the economy and ensuring access to capital and other financial services in an easy manner This promotes savings and generates higher investment. Evidence from some of these studies suggests that financial development is one of the key variables promoting private investment
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