Financial Development and Economic Growth in Ghana: Is There a Casual Link?

Abstract

This study seeks to find out whether financial development in Ghana conforms to either the supply-leading, demand-following or Patrick’s Stages of development hypothesis. A bivariate VAR model is estimated in four scenarios, after which Granger-causality test, Impulse Response Function and Variance Decomposition analyses were conducted for each respective scenario of the VAR. Whereas there is some evidence in support of demand following hypothesis, when growth of broad money to GDP ratio is used as a measure of financial development, there is no significant evidence to support either the supply-leading or demand-following hypothesis when growth in domestic credit ratio are used as proxies for financial development. Also, in all the four Scenarios, there is no statistical evidence to support Patrick’s Stages of development hypothesis in Ghana.