Financial Openness and Economic Growth in Nigeria: A Vector Error Correction Approach

Abstract

This paper tests the hypothesis that financial openness promotes economic growth. Theoretically and empirically, the results are mixed. The study used vector error correction modelling and to capture impact of financial openness, financial depth measured as ratio of broad money supply to gross domestic product was used as proxy for financial openness, with government policy and ratio of trade openness as other explanatory variables. Our data set that are annual in nature covering the period 1970–2010 were subjected to unit root and co-integration tests. Empirical results showed that all variables are I(I) and are significant at 1,5, and 10 percent. Co-integration results revealed that a stable long run equilibrium relationship exists between the variables. The estimated result revealed that the null hypothesis is rejected for all explanatory variables even though only financial openness satisfied apriori expectation. The study recommends legal and accounting reforms required to strengthen operations in the financial sector, in addition to more efficient supervision from the apex bank. This, we believe can boost financial development and accelerate economic growth. To achieve this, government policies should be consistent.