Estimating the Causal Relationship between Financial Development and Economic Growth in Nigeria

Abstract

The aim of this study is to estimate the causal relationship between financial development and economic growth in Nigeria covering the period of 1970 to 2012. This study attempts to include all the financial development indicators and explain their effects on economic growth proxied by real GDP. The study used an time series method of analysis of data and setting up over parameterized model to capture all variables relating to financial development, however, through simplification, a more encompassing parsimonious and interpretable model was obtained by dropping insignificant variables. The study used time series econometrics method and Augumented Dickey-Fuller test statistics to examine the stationarity status of the series. Also, Johansen cointegration and Granger causality test statistics were employed to check the long run equilibrium of the series and to determine the direction of causality between financial development and economic growth. Results show that all the series were stationary at first difference I(1); also, there exist a stable relationship between financial development and economic growth in Nigeria. The result also shows a uni-directional causal relationship between financial development and economic growth. Specifically, there is a significant pass through from domestic saving to economic. This implies that given the period of the study, financial development stirs-up economic growth. The study reveals that time deposits and foreign direct investment (FDI) contributed significantly to economic growth in Nigeria. However, credit to private sector (RPSC), domestic saving (RDSA) and real money supply (RMS) make very little contribution to economic in Nigeria.