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Does financial sector development cause investment and growth? empirical analysis of the case of Ghana


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  • Adam, Anokye M.
  • Siaw, Frimpong


This article examines whether financial sector development has ‘caused’ economic growth and investment in Ghana between 1970 and 2007. As a proxy for financial sector development we use credit to private sector as per cent of GDP, bank liquid reserve – asset ratio and liquid liability as a per cent of GDP. We use GDP growth as a proxy for economic growth and real domestic investment for investment growth. The dynamic interactions between the growth of real Per capita Gross Domestic Product, real domestic investment and indicators of financial sector development are investigated using the concept of Granger Causality after testing for cointegration using Johansen techniques. The empirical results obtained by the Johansen method suggest the existence of a stable long-run relationship between growth rate and financial sector development indicators identified in the study. The same is true for investment growth. However, with the exception of credit to private sector where the causality runs from economic growth only, we find bidirectional causality between economic growth and financial sector development indicators. For investment growth, the causality runs from investment growth to financial sector indicators except between investment growth and Liquid liability where bidirectional causality recorded. The article establishes that, in an overall sense, economic and investment have ‘caused’ financial sector development in Ghana

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39634.

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Date of creation: 2010
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Publication status: Published in Journal of Business and Enterprise Development 1.2(2010): pp. 67-84
Handle: RePEc:pra:mprapa:39634

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Related research

Keywords: Economic growth; financial sector development; Cointegration; Granger- Causality;

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  1. Obstfeld, Maurice, 1992. "Risk-Taking, Global Diversification, and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 688, C.E.P.R. Discussion Papers.
  2. Koivu, Tuuli, 2002. "Do efficient banking sectors accelerate economic growth in transition countries," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 14/2002, Bank of Finland, Institute for Economies in Transition.
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  4. van Wijnbergen, Sweder, 1983. "Credit policy, inflation and growth in a financially repressed economy," Journal of Development Economics, Elsevier, Elsevier, vol. 13(1-2), pages 45-65.
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  7. Drakos, Kostas, 2003. "Assessing the success of reform in transition banking 10 years later: an interest margins analysis," Journal of Policy Modeling, Elsevier, Elsevier, vol. 25(3), pages 309-317, April.
  8. Akinlo, A. Enisan, 2004. "Foreign direct investment and growth in Nigeria: An empirical investigation," Journal of Policy Modeling, Elsevier, Elsevier, vol. 26(5), pages 627-639, July.
  9. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, Elsevier, vol. 37(2-3), pages 613-622, April.
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