Impact of Financial Sector Development on Economic Growth in Nigeria: Evidence from Nonlinear ARDL Model

Résumé

Abstract

This study examines the impact of financial sector development on economic growth in Nigeria using annual data from 1986 to 2018. To estimate the dynamic and asymmetric relationship among the variables in the study, a Non-linear Autoregressive Distributed Lag (NARDL) model was employed. The results suggest a positive asymmetric impact of financial deepening (in its one-period lag) on economic growth in the long run, but a negative impact in the short-run. More explicitly, the positive (negative) partial sum of changes of M2/GDP has a negative (negative) impact on GDPGR, while the positive (negative) partial sum of changes of M2/GDP(-1) has a positive (negative) impact on GDPGR, in the long-run. In the short-run, the partial sum of the policy variable suggests an inverse relationship with the dependent variable i.e. the positive (negative) partial sum of changes of M2/GDP has a negative (positive) impact on GDPGR. Furthermore, the control variable appears to be insignificant in examining its asymmetric relationship with the target variable. The results imply that M2/GDP hampers economic growth in the short-run, while it positively impacts growth in the long run. The researchers concluded that to achieve a steady economic growth, the financial deepening should be strengthened through expansion in the money supply, while attention should be given to the complimentary and coordinated development of financial reforms and changes in the real sector of the economy.