Financial development, economic growth, and poverty reduction: evidence from Ghana.

Abstract

The study investigates the relationship between financial development, economic growth, and poverty reduction using quarterly data from 1990:1 to 2015:4 for Ghana, applying Maximum Likelihood Estimation technique and by means of the Autoregressive Distributed Lag (ARDL) approach and the Granger causality test. The study found a unique cointegration relationship between and among the key variables in the models. Further, banking sector, stock market, bond market, government expenditure, gross fixed capital formation, trade openness, and foreign direct investment exerted positive and statistically significant effects on economic growth both in the short-run and the long-run suggesting that these variables positively influence economic growth in Ghana. However, inflation and real interest rate have negative and statistically significant effects on both the financial development and the economic growth. Again, financial development, economic growth, trade openness government expenditure, and gross fixed capital formation exerted negative and statistically significant effects on poverty reduction. This means these variables help in reducing poverty. However, inflation is positive in sign and detrimental to poverty reduction. The Granger causality test results generally revealed unidirectional causality between and among the key variables in the models. It is therefore recommended that Government of Ghana and Central Bank of Ghana need to maintain a continuous effort in developing the financial sector. This will in turn spur economic growth, and hence poverty reduction.