Abstract
This study examines the relationship between Financial Sector Development and Economic Growth in Ghana using time series data from 1980-2009. The study investigates empirically the impact of financial sector development on economic growth in Ghana using the Granger Causality Test, the Johansen Cointegration and the Error Correction Modeling (ECM) techniques. The intent of the framework used is to find out whether there exists a long-run relationship between growth and finance. The study concludes that there exist a positive long run relationship between economic growth and financial sector development with financial sector developments Granger causing economic growth in Ghana. An enabling environment and financial sector interventions such as low interest rate that will enhance transfer of credit to the private sector must be pursued to enhance the economic development of Ghana. Government should put in place appropriate fiscal and monetary policies to encourage the increase of credits to the private sector of the economy. This will boost economic growth immensely as shown by the results from our analysis.Government should encourage domestic producers with favourable tax incentives to enable them produce more for export which will intend increase the country’s GDP to a great extent.Government policy should focus on ensuring that capital stock is allocated efficiently to the productive sectors of the economy such as industry and agriculture.Policies should be put in place to increase and improve upon the human capital accumulation of skills in all areas, both financial and real sectors of the economy, to have a positive effect on the Ghanaian economy.
Highlights
1.1 Background of the Study The finance services industry encompasses a broad range of organizations that deal with the management of money
The theoretical framework employed in this paper is patterned after an adaptation of the model used by Odedokun, which was developed by Feder (1983) for evaluating the impact of export expansion on economic growth
(1998) where he used two alternative measures of financial intermediation, the stock of domestic credit to the private sector and the stock of liquid liabilities while this study uses the stock of domestic credit to the private sector as a proxy to investigate the role of financial sector development on economic growth in Ghana
Summary
1.1 Background of the Study The finance services industry encompasses a broad range of organizations that deal with the management of money. Financial development involves improvements in the (i) production of ex-ante information about possible investments, (ii) monitoring of investments and implementation of corporate governance, (iii) trading, diversification, and management of risk, (iv) mobilization and pooling of savings, and (v) exchange of goods and services Each of these financial functions may influence savings and investment decisions and economic growth. The supply leading causal relationship has two functions These are, to transfer resources form traditional low-growth sector to the modern high-growth sectors and to promote and stimulate an entrepreneurial response in the modern sector (Patrick, 1966). Other recent empirical studies that were based on a similar approach include Gertlerand Rose (1991); Ghani (1992); King and Levine (1993a; 1993 c); Odedokun (1992b); and Roubini ad Sala-i- Martin (1991) Most of these studies have reported effects of financial intermediation on economic growth. Ghana realized the pivotal role of financial development in economic growth and structural change and steps were taken to establish financial institutions, of which the banking system was the most significant
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