Monetary Deepening and Economic Growth in Ghana

Using quarterly data from 1993 to 2018, this study examined the connection between economic development and financial deepening for the instance of Ghana. Real GDP per capita was used to assess economic growth while lending to the private sector and broad money were used to gauge financial deepening. Other factors were interest rate, government spending/GDP, and gross fixed capital formation/GDP. The results showed a positive long-run relationship between financial deepening as measured by credit to the private sector/GDP and economic growth but no such relationship when financial deepening was measured by broad money/GDP. This relationship was found using the Johansen cointegration approach, vector error correction, vector autoregressive, and Granger causality approaches. Capital stock was shown to be the most significant determinant of economic growth according to the forecast error variance decomposition results. Economic expansion has the greatest bearing on capital stock and financial deepening. Financial deepening was the most significant determinant of real interest rates. When credit to the private sector and GDP were used as proxies for financial deepening, the study revealed support for the endogenous growth forecast. However, when financial deepening was proxied by wide money to GDP, evidence for the demand-pulling hypothesis was discovered. According to the report, the Bank of Ghana should think about improving the institutional, legal, and regulatory environment to let financial institutions carry out their duties without interference. The government may also think about continuing its consistent development strategy and ensuring that the banking sector reforms are implemented.   

Using quarterly data from 1993 to 2018, this study examined the connection between economic development and financial deepening for the instance of Ghana. Real GDP per capita was used to assess economic growth while lending to the private sector and broad money were used to gauge financial deepening. Other factors were interest rate, government spending/GDP, and gross fixed capital formation/GDP. The results showed a positive long-run relationship between financial deepening as measured by credit to the private sector/GDP and economic growth but no such relationship when financial deepening was measured by broad money/GDP. This relationship was found using the Johansen cointegration approach, vector error correction, vector autoregressive, and Granger causality approaches. Capital stock was shown to be the most significant determinant of economic growth according to the forecast error variance decomposition results. Economic expansion has the greatest bearing on capital stock and financial deepening. Financial deepening was the most significant determinant of real interest rates. When credit to the private sector and GDP were used as proxies for financial deepening, the study revealed support for the endogenous growth forecast. However, when financial deepening was proxied by wide money to GDP, evidence for the demand-pulling hypothesis was discovered. According to the report, the Bank of Ghana should think about improving the institutional, legal, and regulatory environment to let financial institutions carry out their duties without interference. The government may also think about continuing its consistent development strategy and ensuring that the banking sector reforms are implemented.