Financial Sector Development and Economic Growth: The Case of ECOWAS Countries

Abstract

This paper empirically investigates the change in the relationship between economic growth and financial development as ECOWAS economies grow over the period 1991–2017. The methodology of analysis is the quantile regression, which allows determining the impact of financial development at different levels of economic growth. Financial development is measured by private sector credit to GDP and liquid liabilities to GDP. The results indicate that financial development plays a positive and significant role in economic growth process regardless of the level of economic development. The size of the impact of financial development depends on its measure as well as the specification of the model. Our findings also indicate that the impact of finance increases with the level of economic growth between the 10th and the 90th percentile. Moreover, when country fixed effects are taken into consideration, the impact of finance rises significantly at the lowest percentiles of economic development, while it remains relatively stable at medium and high levels of economic development. Finally, the findings point out the absence of linearity in the linkage between finance and economic growth.