*3.2. Estimation Results*

#### 3.2.1. Panel Estimation Results

The results of the impact of financial development, real exchange rate and their interaction term on economic growth are reported in Table 3. Column 1 is the baseline model without interaction term, and it shows that financial development has a positive and significant long-term impact on economic growth, suggesting that variations in financial development can explain variations in economic growth in the West African region. In the short term, however, the impact of financial development on economic growth is not statistically significant at conventional level. In Column 2, the interaction term between financial development and real exchange rate is included in the model, and we find that the interaction term enters with a negative coefficient, in both the long term and short term, while the coefficient of financial development remains positive. This suggests that real exchange rate has an adverse effect on economic growth through the financial sector. In essence, the positive sign of the coefficient of financial development and the negative sign of the coefficient of interaction term sugges<sup>t</sup> that the positive impact of financial development on economic growth is adversely influenced by real exchange rate. In Column 3, the linear real exchange rate is included in the model, and the results reveal that both the linear real exchange rate and the interaction term enter with negative coefficients in both the short term and long term, while the coefficient of financial development remains positive (albeit statistically insignificant at conventional level). Thus, the inclusion of both the linear real exchange rate and the interaction term in the model weakens the positive impact of financial development on economic growth.


**Table 3.** Pooled Mean Group (PMG) estimation results.

Notes: \*\*\*, \*\* and \* indicate statistically significant at 1%, 5% and 10%, respectively. Standard errors are in parenthesis. Dependent variable = economic growth; CPS = credit to the private sector relative to GDP, RER = real exchange rate, CPS\*RER = interaction term between credit to the private sector and real exchange rate, RERV = real exchange rate volatility, CPS\*RERV = interaction term between credit to the private sector and real exchange rate volatility, GOV = governmen<sup>t</sup> consumption expenditure relative to GDP, TOP = trade openness relative to GDP, HCA = human capital, INF = inflation rate.

In Columns 4 and 5, we replace real exchange rate with real exchange rate volatility. This is necessary because volatility in the real exchange rate could have effect on various dimensions of the economy, one of which is the finance-growth nexus. Hence, we measure real exchange rate volatility as the standard deviation of the 5-year moving average of the logarithm of the real exchange rate (see Aghion et al. 2009; Serenis and Tsounis 2013; Sharifi-Renani and Mirfatah 2012), The results presented in Columns 4 and 5 indicate that the coefficient of the real exchange rate volatility is negative implying that volatility in the real exchange rate is repugnan<sup>t</sup> to economic growth through the financial sector. This suggests that the impact of financial development on economic growth varies with the level of the real exchange rate volatility, the higher the level of volatility, the lower the impact of finance on growth.

In all the models, the convergence coefficients are negative and statistically significant, which sugges<sup>t</sup> the presence of cointegration relationship between economic growth and the independent variables. It shows the speed of adjustment from short-term disequilibrium to long-term equilibrium. The Hausman tests of homogeneity indicate that the PMG models are the appropriate models5. In selecting the lag orders for the models, the study uses the unrestricted models based on Schwarz Information Criteria (SIC) subject to a maximum lag of 2.

The lower panel of Table 3 shows the computed marginal effects of financial development on economic growth at various levels of the real exchange rate and its volatility using Equation (2) and the estimated long-term coefficients. We find that the marginal effects diminish with higher real exchange rate and higher volatility. We also compute the corresponding standard errors and t-statistics to determine the statistical significance of the marginal effects. Thus, real exchange rate and its volatility have diminishing effects on the impact of financial development on economic growth in the West African region.

As for the control variables, there is evidence of positive growth-effect from governmen<sup>t</sup> consumption expenditure, trade openness and human capital, which are consistent with economic theory. The endogenous growth model posited that access to global markets via international trade makes an open economy more likely to grow rapidly and efficiently than a closed economy. It also stressed the importance of human capital accumulation in the process of economic growth. Finally, the effect of inflation rate on economic growth is mixed. Theoretical and empirical literature contended that inflation rate begins to have a negative impact on economic growth when it exceeds a certain threshold level (see Rousseau and Wachtel 2002).
