Modeling Causality between Gross Fixed Capital Formation and Credit to the Private Sector

Abstract

The current paper examines the causality nexus between finance and investment flow in Ghana during the period 1970-2011. Using the Granger causality test model on a single time series variables, it is found that finance (proxied by credit to the private sector) Granger causes investment flow (proxied by gross fixed capital formation) without feedback effect. The financial sector should be developed to generate investment and not the vice versa. Future study should consider other financial and investment variables as well as panel analysis and structural breaks.