Financial Development and Economic Growth: Additional Evidence from Ghana

Abstract

Although the finance-growth relationship has been looked at in many African countries such as Ghana, the outcomes have been mixed while the causal direction between the two variables has particularly not been examined. This study, therefore, applied ARDL approach and Granger causality test to investigating the relationship and the causal direction between financial development and economic growth in Ghana during the period 1970-2013. The study revealed that the amount of credit from domestic sources to the private sector maintained a positively significant nexus with the growth of the economy whereas the domestic deposit was not the case. Also, the results established that there is a dependence of the Ghanaian economy to the changes in domestic credit to private sector whilst there exists a uni-directional causality running from the variations in economic growth to the domestic deposit in Ghana. Consistent with the findings, it is recommended that the authorities concentrate on improving the efficiency of the financial system to allow deposits to be channelled to growth-inducing investments to bring about the long-term growth of the economy.