Financial Development, Governance and Economic Growth: A Causal Analysis

This study seeks to establish the causal relationships among variables of financial sector development, governance quality, and economic growth in Liberia. To achieve this objective, the researchers gathered secondary time series data from the World Development Indicators and the Worldwide Governance Indicators covering the period 1980 to 2019. The Autoregressive Distributed Lag (ARDL) Model and the Granger Causality Test were used for estimations. The estimation results (particularly the Granger Causality Test) found a uni-directional causal relationship flowing from financial sector development to economic growth - implying that economic growth is caused by financial sector development. Among other things, this study recommends that policy measures that are meant to revamp the Liberian economy be channeled through the financial sector; and that the Government, through the Central Bank, ensures that lending interest rates on borrowed funds are kept in minimum range to enable the private sector acquire loanable funds for investment purposes.