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.
1. Abid, F., Bahloul, S., & Mroua, M. (2016). Financial development and economic growth in MENA countries. Journal of Policy Modeling, 38(6), 1099-1117.
2. Abubakar, A., Kassim, S. H., & Yusoff, M. B. (2015). Financial development, human capital accumulation and economic growth: Empirical evidence from the economic community of West African States (ECOWAS). Procedia-Social and Behavioral Sciences, 172, 96-10
3. Adeniyi, O., Oyinlola, A., Omisakin, O., & Egwaikhide, F. O. (2015). Financial development and economic growth in Nigeria: Evidence from threshold modelling.Economic Analysis and Policy, 47, 11-21.
4. Awojobi, O. (2013). Does trade openness and financial liberalization foster growth? An empirical study of Greek economy. International Journal of Social Economics, 40(6), 537-555.
5. Batuo, M., Mlambo, K., & Asongu, S. (2018). Linkages between financial development, financial instability, financial liberalisation and economic growth in Africa. Research in International Business and Finance, 45, 168-179.
6. Demetriades, P. O. & Luintel, K. B. (1996). Financial development, economic growth and banking sector controls: Evidence from India. The Economic Journal, 106(435), 359-74.
7. Dinu, A.M. (2015), Informatic models used in economic analysis of correlation between GDP and FDI. Polish Journal of Management Studies, 11(2), 7-16.
8. Ductor, L., & Grechyna, D. (2015). Financial development, real sector, and economic growth. International Review of Economics & Finance, 37, 393-405.
9. Ehigiamusoe, U. K. (2013). The Link between money market and economic growth in Nigeria: Vector error correction model approach. International Journal of Social, Behavioural, Educational, Economic and Management Engineering, 7(12), 1799-1807.
10. Engle, R. F. & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation and testing. Econometrica, 55(2), 251-276.
11. Gaytan, A. & Ranciere, R. (2005). Banks, liquidity crises and economic growth. DEGIT Conference Papers. DEGIT, Dynamics, Economic Growth and International Trade.
12. Gries, T., Kraft, M. & Meierrieks, D. (2009). Linkages between financial deepening, trade openness, and economic development: Causality evidence from sub-Saharan Africa. World Development, 37(12), 1849-1860.
13. Ibrahim, H., Xiang, N., Nik Azman, N., & Zulkafli, A. (2018). Comparative study on board structure and performance between domestic and foreign banks in Malaysia. Economics, Management And Sustainability, 3(2), 42-59. doi:10.14254/jems.2018.3-2.4.
14. Ibrahim, M. H. (2007). The role of the financial sector in economic development: The Malaysian case. International Review of Economics, 54(4), 463-483.
15. Inekwe, J. N., Jin, Y., & Valenzuela, M. R. (2018). The effects of financial distress: Evidence from US GDP growth. Economic Modelling, 72, 8-21.
16. Kagochi, J. M., Al Nasser, O. M. & Kebede, E. (2013). Does financial development hold the key to economic growth? The case of sub-Saharan Africa. The Journal of Developing Areas, 47(2), 61-79.
17. Kasperowicz, R. (2015). Economic growth and CO2 emissions: The ECM analysis. Journal of International Studies, 8(3), 91-98.
18. Kim, D. W., Yu, J. S., & Hassan, M. K. (2018). Financial inclusion and economic growth in OIC countries. Research in International Business and Finance, 43, 1-14.
19. Lanne, M., Lütkepohl, H. & Saikkonen, P. (2002). Comparison of unit root tests for time series with level shifts. Journal of Time Series Analysis, 23(6), 667-685.
20. Levine, R., Loayza, N. & Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46(1), 31-77.
21. Loayza, N. & Ranciere, R. (2006). Financial development, financial fragility, and growth. Journal of Money, Credit, and Banking, 38(4), 1051-1076.
22. Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.
23. Luintel, K. B. & Khan, M. (1999). A quantitative reassessment of the finance-growth nexus: Evidence from a multivariate VAR. Journal of Development Economics, 60(2), 381-405.
24. Luintel, K. B., Khan, M., Leon-Gonzalez, R., & Li, G. (2016). Financial development, structure and growth: New data, method and results. Journal of International Financial Markets, Institutions and Money, 43, 95-112.
25. McKinnon, R. I. (1973). Money and capital in economic development: Brookings Institution Press.
26. Milovic, N., Jocovic, M. (2017). Impact of Foreign Direct Investment on Competitiveness of Montenegrin Economy. Transformations in Business & Economics, 16(1) (40), 222-232.
27. National Bureau of Statistics. (2014). Nigeria Gross Domestic Report, Quarter Three. Retrieved February 10, 2015, from http://www.nigerianstat.gov.ng/
28. Neaime, S., & Gaysset, I. (2018). Financial inclusion and stability in MENA: Evidence from poverty and inequality. Finance Research Letters, 24, 230-237.
29. Nwosa, P. I., Agbeluyi, A. M. & Saibu, O. M. (2011). Causal relationships between financial developments, foreign direct investment and economic growth. International Journal of Business Administration, 2(4), 93-102.
30. Ogujiuba, K. & Obiechina, M. E. (2011). Financial sector reforms in Nigeria: Issues and challenges. International Journal of Business and Management, 6(6), 222-233.
31. Ohanyan G., Androniceanu, A. (2017). Evaluation of IMF program effects on employment in the EU, Acta Oeconomica, 67(3), 311-332.
32. Ohwofasa, B. O. & Aiyedogbon, J. O. C. P. (2013). Financial deepening and economic growth in Nigeria, 1986-2011: An empirical investigation. Journal of Economics and Development Studies, 1(1), 24-42.
33. Onyusheva, I., Thammashote, L., & Kot, S. (2018), ASEAN: Problems of regional integration. Espacios, 39(36). Retrieved February 10, 2018, from https://www.revistaespacios.com
34. Osundina, K. C. & Osundina, J. A. (2014). Capital accumulation, savings and economic growth of a nation: Evidence from Nigeria. Global institute of research and Education 3(3), 151-155.
35. Ouattara, B. (2004). Foreign Aid and Fiscal Policy in Senegal: Mimeo University of Manchester Manchester.
36. Owusu, E. L. & Odhiambo, N. M. (2012). The role of financial liberalization in Nigeria: A review of key policy issues. Economics, Management, and Financial Markets, 7(3), 89-107.
37. Patrick, H. T. (1966). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14(2), 174- 189.
38. Pesaran, M. H., Shin, Y. & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.
39. Pietrucha, J., & Acedański, J. (2017). Financial depth and post-2008 change of GDP. Equilibrium. Quarterly Journal of Economics and Economic Policy, 12(3), 469–482. https://doi.org/10.24136/eq.v12i3.25.
40. Pradhan, R. P., Arvin, M. B., & Bahmani, S. (2018). Are innovation and financial development causative factors in economic growth? Evidence from a panel granger causality test. Technological Forecasting and Social Change, 132, 130-142.
41. Rahim, N. H. A. & Abedin, N. F. Z. (2014). Trade liberalisation, financial development and growth in Malaysia. International Proceedings of Economics Development and Research, 74(7), 38-42.
42. Rajan, R. G. (1994). Why bank credit policies fluctuate: A theory and some evidence. The Quarterly Journal of Economics, 109(2), 399-441.
43. Robin, I., Salim, R., & Bloch, H. (2018). Financial performance of commercial banks in the post-reform era: Further evidence from Bangladesh. Economic Analysis and Policy, 58, 43-54.
44. Saikkonen, P. & Lütkepohl, H. (2002). Testing for a unit root in a time series with a level shift at unknown time. Econometric Theory, 18(02), 313-348.
45. Samargandi, N., & Kutan, A. M. (2016). Private credit spill overs and economic growth: Evidence from BRICS countries. Journal of International Financial Markets, Institutions and Money, 44, 56-84.
46. Schumpeter, J. A. (1911). The Theory of Economic Development. Cambridge, MA: Harvard University Press.
47. Simionescu, M. (2016). Quarterly inflation rate target and forecasts in Romania. Economics, Management and Sustainability, 1(1), 6-13. doi:10.14254/jems.2016.1-1.1.
48. Simionescu, M., Balcerzak, A., Bilan, Y., & Kotásková, A. (2018). The impact of money on output in Czech Republic and Romania. Journal of Business Economics and Management, 19(1), 20-41. https://doi.org/10.3846/jbem.2018.1480.
49. Simionescu, M., Ciuiu, D., Bilan, Y., & Strielkowski, W. (2016). GDP and net migration in some eastern and south-eastern countries of Europe. A panel data and Bayesian approach. Montenegrin Journal of Economics, 12(2), 161-175. doi:10.14254/1800-5845.2016
50. Shaw, E. S. (1973). Financial Deepening in Economic Development. New York: Oxford University Press.
51. Solow, R. M. (1956). A Contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94.
52. Swan, T. (1956). Economic growth and capital accumulation. Economic Record, 32(2), 334-361.
53. Štreimikienė, D., Strielkowski, W., Bilan, Y., & Mikalauskas, I. (2016). Energy dependency and sustainable regional development in the Baltic States: A review. Geographica Pannonica, 20(2), 79-87. https://doi.org/10.5937/GeoPan1602079S
54. Taha, R., Colombage, S. R. & Maslyuk, S. (2009). Financial development and economic growth in Malaysia: Cointegration and co-feature analysis. Monash University, Department of Economics.
55. The World Bank (2018). World Bank Development Indicators. Retrieved 24th January 2018 from http://worldbank.com
56. Toda, H. Y. & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1), 225-250.
57. Vithessonthi, C. & Kumarasinghe, S. (2016). Financial development, international trade integration, and stock market integration: Evidence from Asia. Journal of Multinational Financial Management, 35, 79-92.
58. Vovk, I., Vovk, Y., & Lyashuk, O. (2017). Improvement of the organizational-economic mechanism of resource-saving at the machine building enterprise. Economics, Management And Sustainability, 2(2), 6-14. doi:10.14254/jems.2017.2-2.1.
59. Waheed, A. & Younus, N. (2010). Effects of financial sector's development and financial sector's efficiency on economic growth: empirical evidence from developing and developed countries. International Journal of Economic Perspectives, 4(2), 449-458.
60. Wu, Z.-C., & Chen, J.-L. (2017). Financial Obstacles, Bank Credit, and Trade Credit: Evidence from Firm Surveys in China. Transformations in Business & Economics, 16(2B (41B)), 787-801.