Response of Economic Growth to the Dynamics of Financial Sector Development in the West African Economic and Monetary Union

Abstract

This study examined the role of a regional body in the nexus between financial sector development and economic growth with special reference to West African Economic and Monetary Union (WAEMU) member states over the period 1985 to 2014. The overall results of panel unit root tests showed that only three variables (government final consumption expenditure, inflation, and FDI inflow) were stationary at levels, while the remaining five variables achieved stationarity after first differencing. The overall result of the panel cointegration tests indicates the presence of a long-run relationship between financial development and economic growth, irrespective of the financial development indicators considered. Moreover, the result of model estimation reveals that the variables explored in the study largely drive economic growth in the WAEMU region over the short to long term. Also, the WAEMU body had a positive influence on growth through the financial development indicators—liquid liabilities and private credit. The study recommends that the monetary union should ensure strict compliance with the convergence criteria by its member states. The growth potentials of the financial sector can be derived by ensuring the transfer of adequate liquidity from liquiditysurplus economies to liquidity-deficit economies across the region.