AN EMPIRICAL ANALYSIS OF FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: (1986 – 2010)

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AN EMPIRICAL ANALYSIS OF FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: (1986 – 2010)

ABSTRACT

Economists have long recognized that the financial system plays a decisive role in the process of economic development (Stiglitz, 1998), some have argued that financial intermediaries mobilize, pool and channel domestic savings into productive capital, and by doing so they contribute to economic growth (supply leading), while others argue, that financial development is a consequence, and not a cause of economic growth. In this view, economic growth increases demand for sophisticated financial instruments, which in turn leads to growth in the financial sector (demand following). This study examines the causal relationship between financial deepening and economic growth in Nigeria for the period 1986 to 2010 using the Vector Auto Regressive model. From the results of the analysis, we found out that; financial deepening does not impact or influence economic growth in the short run. However, in the long run there is a significant effect of financial deepening on economic growth, lending credence to the supply leading hypothesis that financial deepening causes economic growth. It was also observed that GDP had a positive and significant impact on Deposit Money Bank Asset, Money supply and private sector credit, thereby laying credence to the demand following hypothesis. It was recommended that monetary authorities should continue with the policy reforms to consolidate the emerging confidence in the financial system.

AN EMPIRICAL ANALYSIS OF FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: (1986 – 2010)

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