Financial Development and Economic Growth in Nigeria

Abstract

The study examines the causal relationship between financial development and economic growth in Nigeria for the period 1960 to 2014 using dynamic time series model. Granger causality is tested within multivariate co integration and vector error correction model (VECM) framework. Four different measures of financial development are used to capture the different channels through which finance can affect growth. The empirical findings provide evidence that there is a stable positive long run relationship between financial development and economic growth. The result further showed that in Nigeria the direction of causality between financial development and economic growth is sensitive to the choice of proxy used for financial development. Financial development caused economic growth when private sector credit and bank deposit liabilities were used as proxies but when money to income ratio, and domestic credit ratios were alternatively used, growth is found to cause financial development.

Keywords: Financial Development, Economic Growth