An Empirical Investigation into the Effect of Financial Sector Development on Investment and Industrial Capacity Utilization in Nigeria, 1986-2012

Abstract

Investment and capacity utilization has been a subject of concern to Economists all over the world because of the crucial role they play in terms of economic growth of a nation. They constitute the moving vehicles that transform a traditional subsistence economy to a modern one. However, the performance of these macroeconomic aggregates is hinged on the performance of the financial sector.   The low performance of these macroeconomic aggregates in Nigeria therefore calls for an empirical investigation into the effect of financial sector on them. The study is situated within the framework of the supply leading hypothesis. It made use of the 3 stage least square method to estimate the two equations. Simulation experiments were also performed. The paper finds out that MCAP has positive effect on investment and it is significant but ROT has a reducing effect and it is not significant. Also, all the financial variables used had negative effect on CUR and they are statistically significant. The simulation results showed that the shocks in the financial sector have varying effects on GFCF and CUR. The paper therefore recommends that both interest rate and foreign exchange rate should not be left entirely to be determined by the market forces. Government should intervene when necessary. When this is done the growth in GFCF and CUR desired would be achieved.

Keywords:- Financial Sector Development, Investment, Gross Fixed Capital Formation, Industrial Capacity Utilization, Financial Intermediation, Supply Leading Hypothesis, Demand Following Hypothesis, Simulation, Money Market, Capital market, Foreign Exchange Market, Rate of Interest, Market Capitalization and Exchange Rate.