Abstract:
This study examines the relationship between financial liberalization and demand for
money in Ghana using time series data from 1984 to 2020. The study used the
autoregressive distributed lags (ARDL) model to estimate the short- and long-run
relationship between money demand and financial liberalization, as well as other
determinants of money demand. The Augmented Dickey-Fuller (ADF) and Phillips-
Perron (PP) tests showed stationarity of all variables after first-differencing, whereas
inflation was stationary at levels. The cointegration test revealed a long-run
cointegrating relationship and hence an estimation of the unrestricted error correction
model (UECM). The results revealed that the estimates were significant and yielded the
expected signs consistent with theory, except for inflation but it was nonetheless
statistically insignificant. Financial liberalization was found to have a significant
positive relationship with money demand in both short and long run periods. The error
correction term was found to be significant and it yielded the expected negative sign
showing that 12 percent of the disequilibrium from previous annual periods converges
back to long-run equilibrium in the current period. The Granger Causality test
established no causal relationship between the demand for money and financial
liberalization. In the end, the CUSUM, CUSUMSQ, and MOSUM plots diagnosed a
stable demand for money function in Ghana. The threshold model estimated in the study
revealed that financial liberalization had a positive effect on the demand for money in
the initial stages until it reaches a threshold level of 29.34% where further liberalization
of the financial sector affects the money demand function in Ghana negatively, and so
the study recommends that the Bank of Ghana should be cautious about the degree of
financial liberalization they pursue to achieve optimal money demand. If the degree of
financial liberalization is below the threshold level, increasing it could stimulate money
demand, but conversely, if it above the threshold level, reducing it could stabilize
money demand. Since exchange rate had a significant negative relationship with money
demand, the study recommends that the Bank of Ghana uses exchange rate as an
intermediate target to achieve price stability in periods of inflation and recession.
Again, the study recommends that since financial liberalization has a significant
positive relationship with money demand, the Bank of Ghana adopts policies that
ensure rigorous financial discipline to prevent future bank crises.
Description:
A thesis in the Department of Economics Education,
Faculty of Social Sciences Education, submitted to the School of
Graduate Studies in partial fulfillment
of the requirements for the award of the degree of
Master of Philosophy
(Economics)
in the University of Education, Winneba
SEPTEMBER, 2022