Econometrics Analysis of Financial Development and Economic Growth: Evidence from Nigeria

Abstract

This work explored the relationship between financial development and economic growth in Nigeria. Specifically it investigated the extent to which financial development engenders economic growth. It also verified the existence of supply leading and/or demand following hypotheses in Nigeria. To evaluate these, the researchers firstly determined the stationarity of the variables which informed the use of co integration and then the vector error correction model to finding the long run impact of financial development variables on the growth of the economy. The diagnostic test was employed to determine the authenticity and stability of our model. The researchers also employed the Granger Causality test to investigate the existence of supply leading and/or demand following hypothesis. The results of the analyses show that there is a long run relationship between financial development and economic growth in Nigeria and that besides the metric for banking system financing of the economy variable which is significantly inadequate, all other financial development indicators engender economic growth. Our diagnostic test shows that the model is adequate, plausible, and stable. The short run causality test shows bidirectional causality between capital market liquidity or economic volatility and the growth of the economy while market capitalization ratio, broad money velocity and the banking system rate of financing the economy drive economic growth with no feedback effect. On the basis of the findings, the researchers call on the government to articulate reform packages (such that may involve vigorous financial inclusion) capable of enhancing the banking sectors’ involvement in the financing of the economy so as to achieve enormous economic growth.