Modelling the Effects of Financial Liberalization and Economic Growth in Liberia: Evidence from Combined Cointegration Test

Abstract The research aimed was to determine the long-run relationship between financial liberalization, savings mobilization, and investment with a resultant effect on economic growth in the context of the Liberian economy as articulated by McKinnon and Shaw's hypothesis. The study employed time series data spanning from 1980 to 2016 and extracted from World Development Indicators (WDI). The data were analysed using econometric techniques of Combined Cointegration test, Dynamic Ordinary Least Squares (DOLS), Fully Modified Ordinary Squares (FMOLS), and Canonical Cointegration Regression (CCR). To our knowledge, no studies have investigated the effects of financial liberalization and economic growth in Liberia, expressly, employing Combined Cointegration Test. Our findings reveal (i) coefficient of the financial liberalization variable is positive and significant for Liberia, thus support the McKinnon and Shaw hypotheses. (ii) We found combined cointegration among the estimated models. We recommended that policymakers should refrain from any policy that will adversely affect the deposit interest rates considering its immense impact on savings mobilization, gross investment, and the overall economic growth. Furthermore, improving the level of competition will compel deposit-taking financial institutions to raise deposit interest rates in a bid to attract more depositors with a consequential reduction in the interest rates spread.