The relationship between financial sector development and economic growth in Nigeria: Cointegration with structural break approach

Abstract

This research investigates the relationships between the financial sector development and economic growth in Nigeria, using annual time series data for the period between 1981 to 2015. This research examines the long-run relationship between the financial sector development and the economic growth in Nigeria, and applies the Gregory and Hansen (1996a, b) cointegration approach with one endogenously determined structural break and the vector error correction model. This research finds out that, there exist cointegration among the financial development, trade openness and economic growth with structural break date in 2010 and the results from the vector error correction model finds there is significant and negative relationship between financial development and the economic growth in Nigeria in the study period. In addition, the findings of this study indicate that accounting for structural break in VECM improves the significance and thus reliability of the model applied. The estimated model is found to have passed diagnostic tests and is found to be stable. The paper recommends that to achieve the desired economic growth level financial development should be supported with other proactive measures such as sound institution and basic infrastructure to complement the effort of financial sector reforms. Moreover, future analysis should always consider the structural breaks while conducting macroeconomic empirical analysis as it helps in avoiding having spurious results.