Financial Development and Economic Growth Nexus in Nigeria: A Cointegration Analysis

This paper examines the short-run and long-run relationship between financial development and economic growth in Nigeria. After performing cointegration tests, the study estimates error correction models of economic growth on financial development using the autoregressive distributed lag (ARDL) and the nonlinear autoregressive distributed lag (NARDL) approach. The NARDL modelling approach accounts for possible asymmetries in financial development. The study also estimates a vector error correction model with exogenous variables (VECM-X) to observe the relationship in the presence of endogeneity between financial development and economic growth. Annual data on Nigeria’s real gross domestic product is used as a proxy for economic growth, and the financial development index computed by the International Monetary Fund is employed as a proxy for financial development from 1981 to 2020. The Bounds and Johansen cointegration tests show a long-run relationship in the three models. Furthermore, the negative signs and magnitude of the coefficients of the error correction terms suggest mean reversion in all the models. While the study finds cointegration among the variables in all the models, the financial development index is insignificant in the long run and often negatively relates to the real gross domestic product. This paper concludes that financial development does not significantly lead to growth in the real sector, especially in the long run. JEL Classification : C32, E44, O15, O47