Abstract
This paper investigates whether long-run economic growth can be fostered by the impact of financial development in Nigeria, and what could be the empirical explanations for the factors attributable to the continued backwardness of the Nigerian economy in the current millennium? Is the relationship between financial development and economic growth monotonic? To ensure this, we measure the short run and long run Impact of Financial Development on Economic Growth from 1980 to 2011. The “U” and the ARDL bounds testing approach to cointegration were applied. The findings of the study established that financial development and population are the only variables that have contributory impacts in fostering economic growth in both the long-run and short-run in Nigeria. While, M3, bank asset, fixed capital formation, trade and private sectors have insignificant contribution to GDP and are the impediments to Nigeria’s growth dilemma. In another dimension the research established that, the relationship between FD–GDP is monotonic suggesting that too much finance does not prevail in the Nigerian economy. By policy implication the country will be facing prolonged macroeconomic volatility due to the absence of strong exogenous risk cushioning effects, chaotic and unfavourable investment climate, unemployment and persistent exchange rate instability. Eventually these factors could lead to output failure, deterioration in reserve holding that could translate in to currency crisis and an eventual financial crisis. We recommend the pursuance of synergistic monetary policy model that will not only ensure a sustainable and improved value of the local currency but should also create its foreign demand among others.
Similar content being viewed by others
References
Ang, J.B., McKibbin, W.J.: Financial liberalization, financial sector development and growth: evidence from Malaysia. J. Dev. Econ. 84, 215–233 (2007)
Arcand, J., Berkes, E., Panizza, U.: Too Much Finance? International Monetary Fund, Research Department, Washington, DC (2012)
Arestis, P., Demetriades, H.T.: Financial development and economic growth: assessing the evidence. Econ. J. 107, 109–121 (1997)
Al-Yousif, Y.K.: Financial development and economic growth: another look at the evidence from developing countries. Rev. Financ. Econ. 11, 131–150 (2002)
Bagehot, W.: Lombard Street (1962 edn). Richard D. Irwin, Homewood (1873)
Bell, C., Rousseau, P.L.: Post-independence India: a case of finance-led industrialization? J. Dev. Econ. 65, 153–175 (2001)
Chandavarkar, A.: Of finance and development: neglected and unsettled questions. World Dev. 22, 133–142 (1992)
Christopoulos, D.K., Efthymios, G.T.: Financial development and economic growth: evidence from panel unit root and cointegration tests. J. Dev. Econ. 73, 55–74 (2004)
Demetriades, P.O., Hussein, A.K.: Does financial development cause economic growth? Time series evidence from 16 countries. J. Dev. Econ. 51, 387–411 (1996)
Fosu, O.A.E., Magnus, F.J.: Bounds testing approach to cointegration an examination of foreign direct investment, trade and growth relationships. Am. J. Appl. Sci. 3, 2079–2085 (2006)
Goldsmith, R.W.: Financial Structure and Development. Yale University Press, New Haven (1969)
Gonzalo, J.: Five alternative methods of estimating long-run equilibrium relationships. J Econometr. 60, 203–233 (1994)
Greenwood, J., Jovanovic, B.: Financial development, growth, and the distribution of income. J. Polit. Econ. 98, 1076–1107 (1990)
Hicks, J.: A Theory of Economic History. In: Financial Development and Economic Growth: Time Series Evidence from Pakistan and China, vol. 63. Claredon Press, Oxford (1969)
Hye, Q.M.A., Wizarat, S.: Impact of financial liberalization on economic growth: a case study of Pakistan. Asian Econ. Financ. Rev. 3(2), 270–282 (2013)
Inder, B.: Estimating longrun relationship in economics: a comparison of different approaches. J Econometr. 57, 53–68 (1993)
Ireland, P.N.: Money and growth: an alternative approach. Am. Econ. Rev. 84, 47–65 (1994)
Jalil, A., Ma, Y., Naveed, A.: The finance-fluctuation nexus: further evidence from Pakistan and China. Int. Res. J. Financ. Econ. 14, 212–231 (2008)
Johansen, S.: Statistical analysis of cointegrating vectors. J. Econ. Dyn. Control 12, 231–254 (1988)
Johansen, S.: Cointegration in partial systems and the efficiency of single-equation analysis. J. Econometr. 52, 389–402 (1992)
Khan, S.M., Senhadji, A.S.: Financial development and economic growth: an overview. IMF Working Paper 00/209. International Monetary Fund, Washington, DC (2000)
Khan, M.A., Qayyum, A., Saeed, A.S.: Financial development and economic growth: the case of Pakistan. Pakistan Dev. Rev. 44(2), 819–837 (2005)
King, R.G., Levine, R.: Finance and growth: Schumpeter might be right. Q. J. Econ. 108, 717–737 (1993)
Levine, R.: Financial development and economic growth: views and agenda. J. Econ. Lit. 35(2), 688–726 (1997)
Levine, R.: Finance and Growth: Theory and Evidence. NBER Working Paper, No. 10766 (2004)
Lind, J.T., Mehlum, H.: With or without U? The appropriate test for a U-shaped relationship. Oxford Bull. Econ. Stat. 72(1), 109–118 (2010)
Lucas Jr, R.E.: On the mechanics of economic development. J. Monet. Econ. 22, 3–42 (1988)
Luintel, K.B., Khan, M.: A quantitative reassessment of the finance growth nexus: evidence from a multivariate VAR. J. Dev. Econ. 60(2), 381–405 (1999)
Maduka, A.C., Onwuka, K.O.: Financial market structure and economic growth: evidence from Nigeria data. Asian Econ. Financ. Rev. 3(1), 75–98 (2013)
Majid, M.S.: Does financial development and inflation spur economic growth in Thailand? Chulalongkorn J. Econ. 19, 161–184 (2007)
McKinnon, R.I.: Money and Capital in Economic Development. The Brookings Institution, Washington, DC (1973)
Meier, G.M., Seers, D.: Pioneers in Development. Oxford University Press, New York (1984)
Pagano, M., Volpin, P.: The political economy of finance. Oxford Rev. Econ. Policy 17, 502–519 (2001)
Patrick, H.T.: Financial development and economic growth in underdeveloped countries. Econ. Dev. Cult. Change 14(1), 174–189 (1966)
Pesaran, M.H., Pesaran, B.: Working with Microfit 4.0: Interactive Econometric Analysis. Oxford University Press, Oxford (1997)
Pesaran, M.H., Shin, Y.: Long-run structural modelling. Econometr. Rev. 21, 49–87 (2002)
Pesaran, M.H., Shin, Y., Smith, R.J.: Bounds testing approaches to the analysis of level relationships. J. Appl. Econometr. 16, 289–326 (2001)
Rafindadi, A.A., Yusof, Z.: Is financial development a factor to the leading growth profile of the South African economy? Measuring and uncovering the hidden secret. Int. J. Econ. Empirical Res. 1(9), 99–112 (2013a)
Rafindadi, A.A., Yusof, Z.: A startling new empirical finding on the nexus between financial development and economic growth in Kenya. World Appl. Sci. J. 28, 147–161 (2013b)
Ram, R.: Financial development and economic growth: aditional evidence. J. Dev. Stud. 35, 164–174 (1999)
Robinson, J.: The Rate of Interests and Other Easys. Macmillan, London (1952)
Romer, D: Advanced Macroeconomics. The Mcgraw-Hill Series in Economics, 3rd edn (2006)
Rousseau, P. L., Wachtel, P.: Economic growth and financial depth: is the relationship extinct already. Discussion Paper, No. 2005/10. United Nations University (UNU-WIDER) (2005)
Sasabuchi, S.: A test of a multivariate normal mean with composite hypotheses determined by linear inequalities. Biometrika 67(2), 429–439 (1980)
Schmpeter, J.: The Theory of Economic Development (translated by redevers). Dunker and Humblot, Leipzig (1912)
Shahbaz, M.: A reassessment of finance-growth nexus for Pakistan: under the investigation of FMOLS and DOLS techniques. ICFAI J. Appl. Econ. 8(1), 65–80 (2009a)
Shahbaz, M., Shamim, S.M.A., Aamir, N.: Macroeconomic environment and financial sector’s performance: econometric evidence from three traditional approaches. IUP J. Financ. Econ. 1&2, 103–123 (2010a)
Shahbaz, M., Afza, T., Shabbir, M.S.: Financial development, domestic savings and poverty reduction in Pakistan: using cointegration and granger causality analysis. Int. J. Econ. Empirical Res. 1(5), 59–73 (2013)
Shan, J.: Does financial development ‘lead’ economic growth? A vector auto-regression appraisal. Appl. Econ. 37, 1353–1367 (2005)
Shaw, E.S.: Financial Deepening in Economic Development. Havard University Press, Cambridge (1973)
Shrestha, M.B., Chowdhury. K.: A sequential procedure for testing unit roots in the presence of structural break in time series data: an application to Nepalese quarterly data. Int. J. Appl. Econometr. Quant. Stud. 2–2, 1–16 (2005)
Solow, R.M.: A contribution to the theory of economic growth. Q. J. Econ. 70(1), 65–94 (1956)
Stern, N.: The economics of development: a survey. Econ. J. 99, 597–685 (1989)
Stiglitz, J.: More instruments and broader goals: moving towards the post-Washington consensus. WIDER Annual Lectures 2. http://time.dufe.edu.cn/wencong/washingtonconsensus/instrumentsbroadergoals.pdf. Accessed 17 March 2012 (1998)
Wurgler, J.: Financial markets and Allocation of Capital. J. Financ. Econ. 58(1), 187–214 (2000)
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Rafindadi, A.A., Yusof, Z. Do the dynamics of financial development spur economic growth in Nigeria’s contemporal growth struggle? A fact beyond the figures. Qual Quant 49, 365–384 (2015). https://doi.org/10.1007/s11135-014-9991-0
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11135-014-9991-0