Revisiting the finance-growth nexus in Nigeria using frequency domain approach

Abstract

In this paper, we reexamine the causal relationship between financial development and economic growth in Nigeria using annual data over the period 1960-2020. we employ the novel frequency domain causality test based on Granger and Toda-Yamamoto causality tests to identify the direction of the causality in the short (temporary), medium (intermediate) and long-run (permanent). To this end, first, the paper takes advantage of the principal component analysis (PCA) to construct a financial development index using three standard ratios introduced in the literature to measure financial development, namely the broad money stock, the domestic credit to private sector, and the domestic credit to private sector by banks, all expressed as a percentage of GDP. Then economic growth is captured by real GDP per capita. The empirical results suggest a unidirectional permanent causal relationship running from economic growth to financial development.

Keywords

• financial development
• economic growth
• frequency domain causality test
• nigeria