Inflation and Financial Sector Performance: The Case of Nigeria

Abstract The paper examines the long run and short run relationships between inflation and the financial sector development in Nigeria over the period between 1970 and 2012. Three variables, namely; broad definition of money as ratio of GDP, quasi money as share of GDP and credit to private sector as share of GDP, were used to proxy financial sector development. Our findings suggest that inflation presented deleterious effects on financial development over the study period. The main implication of the results is that poor macroeconomic performance has deleterious effects to financial development - a variable that is important for affecting economic growth and income inequality. Moreover, we observed a negative effect of the measures of financial development on growth, suggesting that impact of inflation on the economic growth passes through financial sector. Therefore, low and stable prices, is a necessary first step to achieving a deeper and more active financial sector that will enhance growth as predicted by Schumpeter.