The Dynamic Linkage between Money Market, Capital Market and Economic Growth in Ghana: New Lessons Relearned

Isaac A Ogbuji,Ekundayo P Mesagan,Yasiru O Alimi

doi:10.2478/erfin-2020-0004

Isaac A Ogbuji, Ekundayo P Mesagan + Show 1 more

Open Access

https://doi.org/10.2478/erfin-2020-0004

Copy DOI

Abstract

Abstract This study is a comparative analysis of the effects of money and capital markets on the Ghanaian economy covering the period from 1991 to 2017 using the dynamic Auto Regressive Distributed Lag (ARDL) framework. Empirical results confirmed the existence of a unique and stable long-run relationship between the money market, capital market and economic growth. In respect of money market indicators, findings confirmed that monetary policy and treasury bills rate have had negative but significant impact on growth in the short- and long-run respectively. More so, total liquidity negatively and significantly influenced the Ghana-ian economy both in the short- and in the long run. Both market capitalisation and total value of stock traded, as proxies of capital market, had positive and significant effects on short-run growth, while both indicators as well as stock market turnover negatively and insignificantly affected long-run growth. This means that capital market exerts a short-run impact on the country’s economy, while money market exerts both short- and long-run impacts. The lesson relearned is that the money market propels the Ghanaian economy better than the capital market.

Highlights

One of the key factors in ensuring sustainable growth is the development of financial markets since they are capable of diverting idle financial resources from surplus areas to productive ends (Goldsmith, 1969; Durusu-Ciftci et al, 2017; Mesagan et al, 2018b; Eregha and Mesagan, 2020). Gibson and Tsakalotos (1994) posited that the liberalization of financial markets could improve savings, investments and efficient allocation of financial resources which, in turn, leads to rapid growth of the economy
The results show that monetary policy rate measuring bank rate and total liquidity have adverse and insignificant effect on real per capita income when they are not augmented with other money market indicators
A 10% decrease in treasury bills rate leads to an improvement in real income per capita by 1.38% and 3.33% before and after augmented with other money market indicators respectively

Summary

Introduction

One of the key factors in ensuring sustainable growth is the development of financial markets since they are capable of diverting idle financial resources from surplus areas to productive ends (Goldsmith, 1969; Durusu-Ciftci et al, 2017; Mesagan et al, 2018b; Eregha and Mesagan, 2020). Gibson and Tsakalotos (1994) posited that the liberalization of financial markets could improve savings, investments and efficient allocation of financial resources which, in turn, leads to rapid growth of the economy. For instance, Singh (1997); Nili and Rastad (2007); Enisan and Olufisayo (2009); Adusei (2014); Owusu and Odhiambo (2014b); Mesagan and Nwachukwu (2018), as well as Samargandi et al (2020) confirmed that the situation was quite different in developing countries where financial markets were poorly organised. Their output growth was not substantially enhanced

Methods

Results

Conclusion