Does Liberalization of the Financial Sector Causes Economic Growth? Empirical Evidence from Ghana

In this paper, we examine the effect that financial sector liberalization has on macroeconomic performance in Ghana by using modern time series econometric analysis over the time period 1971-2010. This paper undertakes econometric models such as unit root testing, co-integration and Vector Error Correction (VECM) to empirically analyze the effect of financial sector liberalization on economic growth. Both the short-run and long-run effects of financial liberalization were studied. The results suggest negative and significant long-run relationship between financial liberalization and economic growth. The results are consistent with some of the other studies in other jurisdictions as described in the literature. Finally, it is concluded that the continual strengthening of the Central Bank’s capacity for supervision and prudential regulations such as such as the recent increase in reserve requirement by Bank of Ghana for various categories of financial institutions may have a long term positive effect on the performance of the economy as a whole. Keywords: Financial Liberalization; Macroeconomic Performance; Time Series Models, Co-integration, Vector Error Correction