An Examination of the Relationship between Financial Development and Economic Growth in Nigeria: Application of Multivariate Var Framework

Abstract

This study examined the relationship between financial development and economic growth in Nigeria using annual data for the period 1981-2014. The study employed multivariate VAR framework approach to co-integration to evaluate the long-run relationships between financial development and economic growth. Three financial indicators were used: deposit money bank assets as percentage GDP, ratio of liquid liabilities to GDP and ratio of private sector credit of deposit money banks to GDP. The result found that real gdpc and financial development variables have at least one common stochastic trend driving their relationship. Through VECM granger causality framework, the result found that there is long run unidirectional causality running from economic growth to liquid liability and deposit money bank assets while deposit money bank assets have little significant influence on real gdpc especially at long run. We found feedback effect between private sector credit of deposit money banks and economic growth at the long run. The findings in this study have some important policy implication. To promote the financial system and at the same time promote economic growth, monetary authorities must ensure that banks provide necessary funds to the real sector of the economy.

Key Words: financial development, economic growth, liquid liability, causality, vector error correction