Financial Development and Private Investment in Ghana

Abstract

The study sought to examine the effects of financial development on private investment in Ghana using data set for the period 1984 to 2018. The Vector Error Correction Model (VECM) approach to cointegration, a granger causality test, and an impulse response function were employed with annual data from WDI and the International Monetary Fund (IMF) database to estimate the results of the study. The study found that in the long run, financial development and private investment were negatively related but positively related in the short run. It was also found that there is a unidirectional causality between financial development and private investment in Ghana. Finally, financial development reactions to private investment innovations fluctuate in the short run but have a relatively stable negative impact on private investment in the long run in Ghana. Based on the findings, it is recommended that financial institutions and financial systems should be regulated to impact private investment positively in the long run. Again, the Ministry of Finance and Bank of Ghana as a matter of urgency intensify the development of the financial sector to promote private investment in Ghana. Any efforts or policies to develop the financial sector should include the provision of information and allocation of capital on investment opportunities as well as mobilization of savings and enabling exchange activities within the economy.