“Financial Development and Financial Inclusion in Ghana: Evidence from a Causality Analysis”

Abstract

This study examines the dynamic relationship between financial development and financial inclusion in Ghana using time-series causality and cointegration techniques. Drawing on annual data spanning 2005–2023, the study employs the Autoregressive Distributed Lag (ARDL) bounds testing approach, Error Correction Models (ECM), Vector Error Correction Models (VECM), impulse response functions, forecast error variance decomposition, non-linear threshold models, panel estimations, time-varying parameter models, and structural equation modeling to capture both linear and non-linear dynamics. The ARDL bounds test confirms the existence of a stable long-run equilibrium relationship between financial development and financial inclusion. Empirical results reveal bidirectional causality, with financial development exerting a stronger and more persistent influence on financial inclusion, particularly in the post-digital finance era. Short-run dynamics indicate significant adjustment toward long-run equilibrium, while impulse response and variance decomposition analyses show that shocks to financial development increasingly explain variations in financial inclusion over time. Non-linear and time-varying estimates further demonstrate that the impact of financial development on inclusion intensifies beyond critical financial depth thresholds and strengthens over successive periods. Structural equation modeling highlights the mediating roles of financial infrastructure and regulatory quality in reinforcing this nexus. The findings underscore the complementary and mutually reinforcing nature of financial development and financial inclusion in Ghana. Policy implications emphasize the need for integrated financial sector reforms that deepen financial markets while expanding inclusive access through digital innovation, institutional strengthening, and regulatory efficiency to support sustainable and inclusive economic growth.