Financial Deepening and Economic Growth in Nigeria: an Application of Cointegration and Causality Analysis

Abstract

The study investigates the impact of financial deepening on economic growth in Nigeria. The study examines the causal relationship between financial deepening and Economic Growth in Nigeria for the period 1990-2011. The stationarity properties of the data and the order of integration of the data were tested using both the Augmented Dickey-Fuller (ADF) test and the Phillip-Perron (PP) test. The variables tested stationary at first differences. The Johansen approach of cointegration was applied to test for the long-run relationship among the variables. The result indicated four (4) cointegrating relations between the variables; the Granger-causality suggests that there is unidirectional causality running from economic growth to financial deepening in Nigeria. The study concludes that financial deepening has an impact on economic growth in Nigeria. This implies that developing the financial sector in Nigeria, improves financial structures and ensures efficient delivery of financial services to the private sector to invest to attract more private sector participation for increase output. The study recommends that policy makers should design the policies which will promote the financial and capital markets by removing obstacles that impede their growth and strengthen for healthy and competitive financial system.

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