Heliyon (Feb 2024)
Openness policies and financial development in Ghana: An ARDL approach
Abstract
Purpose: This study investigated the relationship between openness policies (trade and finance) and the degree of financial development in Ghana.Design/methodology/approach: The data for this study were extracted from the World Bank's World Development Indicators from 1960 to 2020. The data consists of annual time series data for Ghana. This study employs the ARDL bounds testing approach for cointegration to estimate the short- and long-run effects of openness policies on financial development in Ghana. In addition, a Markov Switching Model is used as a robustness check to estimate the effect of openness policies and financial development and to handle issues of structural breaks in the dataset.Findings: The study finds that openness policies have a substantial impact on financial development in Ghana and supports the McKinnon–Saw hypothesis. Specifically, financial and trade openness have positive effects on financial development in the long run. However, in the short run, trade openness is the only significant determinant of financial development. The results from the Markov model also indicate that the effect of openness policies on financial development is positive in high and low regimes of financial development, even though foreign investment does not affect financial development in less volatile environments.Originality/value: This study examines the relationship between openness policies (trade and finance) and the degree of financial development in Ghana.Research implications: This study suggests that government policies should focus on enhancing trade agreements to increase trade volumes and promote financial development in the long run. Additionally, reducing restrictions on capital movement across borders could encourage capital inflows and competition among financial institutions, leading to greater efficiency and development of the financial sector. Moreover, policies that promote financial openness can promote long-term financial development in the long run. Therefore, policymakers should work towards liberalizing capital accounts and promoting foreign investment. However, policymakers must be cautious about the potential short-term effects of such policies and work towards mitigating any negative impacts.
