Effect of Financial Deepening on Economic Growth in Nigeria: A Vector Error Correction Model Approach

Abstract

Financial deepening is one of the techniques whose usage can revive the pace of economic growth. In any case, the impact of this policy should be resolved and inspected now and again particularly to developing economies. Emerging countries have financial resources and instruments that are limited and this condition is normally similar to shallow financial depth. Hence, this study aims to examine the effect of financial deepening on economic growth in Nigeria for the periods of 1960-2017. The study proxied financial deepening with broad money supply and credit to private sector while economic growth was proxied with real gross domestic product. Expo-facto research design was utilised and secondary data were extracted from Central Bank of Nigeria statistical bulletin. The study employed the Ordinary Least Square method to estimate the model. In so doing, Vector Error Correction model was used. The study employed Augmented Dickey Fuller test for stationarity of the variables. The Johansen cointegration test was used to determine the long run relationship among the variables. The result indicates that all the variables are non-stationary at levels, but became stationary after first difference. The result of the ordinary least square revealed that broad money supply has positive and significant effect on economic growth in Nigeria while credit to private sector has negative and significant effect on economic growth in Nigeria. The Vector Error Correction model result suggests that there is long and short run effect among the variables. Test for adequacy was performed on the residuals and the results indicate that they are homoskedastic, no serial correlation and are normally distributed. The study concludes that broad money supply drives economic growth in Nigeria while credit to private sector retards economic growth in Nigeria. Based on the findings, the study recommends that Federal government of Nigeria through the Central Bank of Nigeria should continue to increase the volume of broad money supply to the economy as it is found to increase economic growth in Nigeria, it also recommends that Central Bank of Nigeria should reduce interest rate in the economy so that investors may raise their investment and output.