Financial intermediaries and economic growth in Ghana: an empirical investigation

Abstract

This paper examines the impact of bank-based financial development on economic growth in Ghana during the period from 1970 to 2014 – using the autoregressive distributed lag (ARDL) bounds testing approach. Unlike some previous studies, the current study uses five proxies to measure the level of bank-based financial development, including a composite index of bank-based financial development derived from various financial development indicators. The empirical results of this study show that the impact of bank-based financial development on economic growth in Ghana is sensitive to the proxy used to measure bankbased financial development. The results also tend to vary over time. Overall, our results show that when the ratio of domestic credit extension to the private sector by banks to GDP, and the composite index are used as proxies, bank-based financial development has a positive impact on economic growth in Ghana. However, when the ratio of deposit money banks' assets to GDP is used as a proxy, bank-based financial development has a negative impact on economic growth. These results apply, irrespective of whether the analysis is done in the short run or in the long run. Other results show that when the ratio of the claims of deposit money banks on the private sector to broad money is used as a proxy for bank-based financial development, bank-based financial development is found to have a negative impact on economic growth in the short run, but a positive impact in the long run. However, when the ratio of quasi liquid liabilities to GDP is used, the relationship tends to be positive in the short run, but negative in the long run.