FINANCIAL DEVELOPMENT AND ECONOMIC PERFORMANCE IN NIGERIA: GRANGER CAUSALITY ANALYSIS; TEST OF SUPPLY LEADING HYPOTHESIS (NIGERIAN EXPERIENCE)

Abstract

In a well-structured economy, financial development is expected to stimulate growth of the economy however, this paper tend to empirical investigate the relationship between financial development and economic growth in Nigeria using time series data spanning from 1986 to 2014. The output of our empirical analysis reflect that all the data used in this process of research are stationary after first differencing in the order of 1(1) as specifies by the output of the Phillip peron unit root test. the output of the parsimonious error correction model shows that of all the variable used in the process of research, only credit to the private sector (CPS) has a positive and significant influence on the growth of the Nigeria economy while other variable are negative and insignificant. Mine while, the result of the granger causality test shows that there exist a causality flow between PCGDP, IIR and, CPS with causality flowing from PCGDP to financial development indicators (IRR and CPS) respectively. Judging by the output of this research, it show that in the Nigeria context, economic growth determine financial sector development. This suggest that financial development in Nigeria is demand following while the economy is leading. The economic implication of this is that the financial sectors out-rightly rely on the growth of the economy i.e. the speedy the economic growth, the rapid the development of the financial sector in Nigeria.