FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN THE WEST AFRICAN MONETARY ZONE COUNTRIES

George Okorie and Godwin C. Okpara

Abstract

 

The study estimated a model of the relation between financial development and economic growth in the countries of the West African Monetary Zone (WAMZ). Three measures of financial development are used to construct a financial development index FINDEP by means of principal component analysis. The results suggest the existence of a unidirectional causality from financial development to economic growth. The study further examines the long run relationship between RGDP and the composite index of financial sector development using the Johansen Fisher Panel Cointegration tests. The results suggest that the composite variable of financial development have significant long run relationship with RGDP. The paper estimated and presented results for the pooled mean group (PMG), and mean group (MG) models for the regression, as well as the hausman h-test results. The result indicates a statistically significant positive relationship between financial development and economic growth in the long run and a negative and insignificant relationship in the short run. The error correction model in the various analysis is negative, less than 1 and significant at the 5 percent level, signifying a long run relationship between the explanatory variables and the dependent variable. While our analysis shows impressive results suggesting that financial development significantly contributes to economic growth in the long run in the WAMZ, the study recommends greater link between savings and investment and more financial inclusion, as well as the need to have banking crisis resolution frameworks in Member States.

 

 

Key Words: Financial Development, Economic Growth, WAMZ

JEL Classification: C33, E44, F43, O16 and O47

 

FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN THE WEST AFRICAN MONETARY ZONE COUNTRIES