The effects of financial development-trade openness nexus on Nigeria’s dynamic economic growth

Abstract

This study attempts to investigate the short and long-run cointegration with the causal nexus between financial developments, trade and output growth in Nigeria. The financial instability index was generated using the residual based analysis to account for the effect of financial instability on growth. To examine the cointegration effects, the study used Autoregressive Distributed Lag (ARDL) model. The non-Granger causality analysis was also employed to determine the direction of causality between the variables. We found that financial instability retards growth significantly while financial liberalization indicates positive impact, but insignificant effect on growth. The study concluded that there is a long-run nexus between financial development and economic growth in Nigeria. We recommend that proactive measures need to be established to sustain economic growth in the country through enhancing productivity level, encouraging savings culture and economizing resources to promote capital accumulation.