Financial Development and Inflation Nexus in Nigeria: Evidence from ARDL Bounds Testing

Abstract

The nexus between financial development and inflation has been a topic of interest by researchers. This paper investigated the relationship between the two variables in Nigerian context. ARDL bounds testing approach has been employed to check for cointegration relation. The results reveal that financial development (proxied by M2/GDP ratio) is negatively correlated with inflation (proxied by CPI), both in the short run and long run as suggested by the theory. However, the result concords with the theoretical provisions and related literatures in this area. The policy recommendation driven from this work is that,maintenance of low level of inflation could help in enhancing financial development in Nigeria. Therefore, policies geared toward maintenance of low level of inflation are desirable so as to accelerate financial development.

Keywords: Financial Development, Inflation,ARDL bounds testing