Finance – Growth Nexus in Nigeria: Fragility and Development Effects

Abstract

The study investigates the effects of financial fragility and financial development on economic growth in Nigeria between 1982 and 2012. The augumented dickey fuller (ADF) unit root test and the Johanson cointegration tests were respectively used to establish the stationarity and long run properties of the variables. The results show that financial development, proxy by credit to private sector as a percentage of GDP has a positive significant effects on output, as expected. As regards the fragility effects, the result revealed that the effect of financial volatility on economic growth is negative. Financial fragility was refined in the contexts of unsound banking system and unstable financial market, which were proxy by interest rate volatility and exchange rate volatility respectively, thus have negative significant effects on output. It is thus recommended that policy maker’s efforts aimed at increasing growth should work more on developing the financial sector and dampening the volatile nature of financial series. The pairwise granger causality result also reveals that there is a unidirectional causality running from financial fragility to gross capital formation.