FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: EVIDENCE FROM LIBERIA
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Date
2018-12-01
Authors
PROWD, Roosevelt S.
Journal Title
Journal ISSN
Volume Title
Publisher
MAKERERE UNIVERSITY
Abstract
The relationship between financial development and economic growth is a contentious issue. For
developing countries, empirical studies have provided conflicting results. This study seeks to
empirically explore the relationship between financial development and economic growth in
Liberia over the period 1960-2016. Consequently, the study employs the bounds testing approach
to co-integration and error correction models developed within the Autoregressive Distributed
Lag (ARDL) framework to explore the long-run and short-run effects of financial development
on economic growth in Liberia. The empirical results indicate the existence of a long run
relationship between economic growth and financial development in Liberia. The result of the
error correcting term (ECM) indicates an adjustment to the equilibrium state after a shock. The
lagged error term coefficient has the correct sign and is significant at 1% test level. This suggests
that about 92% of distortions created by shocks in the preceding year can be restored in the
current year. This serves to further affirm the presence of long-run financial development and
economic growth nexus in Liberia. In the short run, however, the results showed that financial
development and economic growth are insignificantly related. Consistent with the findings, it is
recommended that processes and institutions that facilitate a sound and competitive financial
market must be improved for efficient allocation of credit and insurance, collection of loans, and
secure and efficient payment services based on transaction accounts, as well as the protection of
depositors and safety of the financial system. These reforms would contribute to improving the
quality and affordability of financial services available to consumers and business of all sizes,
particularly SMEs and to low-income households and thus spur growth.
Description
HG 4501