THE EFFECT OF FINANCIAL DEVELOPMENT AND MONETARY POLICY ON ECONOMIC GROWTH IN GHANA

Prince Mike Sena

Working Papers from African Economic Research Consortium

Abstract: The link between financial development and monetary policy has received considerable attention in many African Countries such as Ghana. This, notwithstanding, empirical evidence on the link have been mixed. The study, therefore, applied the Autoregressive Distributed Lag (ARDL) approach to investigating whether financial development influences monetary policy effectiveness on economic growth in Ghana for the period 1980 to 2016. The results revealed that monetary policy's impacts on economic growth via financial development is positive and statistically significant suggesting that financial development strengthens the effects of monetary policy on economic growth in Ghana. Further, financial development, monetary policy, foreign direct investment, remittances, capital and labour supply exerted positive and statistically significant impact on economic growth both in the short-run and the long-run. Signifying that these variables are critical in enhancing sustained economic growth and development in Ghana. However, inflation proved to be detrimental to economic growth both in the long-run and short-run. The conduct of the Granger causality test also revealed a unidirectional causality running from economic growth to financial development. It is therefore recommended that Bank of Ghana should strengthen monetary policy transmission via deliberate efforts to deepen financial sector development and improve the competitiveness of financial markets. Bank of Ghana should also build strong and resilient institutional frameworks to foster the development of financial markets so as to deepen the influence of monetary policy on market interest rates in the financial sector.

Date: 2018-11-12
Note: African Economic Research Consortium
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