THE NEXUS BETWEEN FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: ARDL & CAUSALITY APPROACH.....

This paper uses principal component analysis to construct financial development indices, Auto-regressive Distributed Lag (ARDL), and the Granger causality approach to investigate the dynamic causal relationship between financial deepening, economic growth, and four other macroeconomic variables in Nigeria from 1981 to 2014. Our findings are divided into three categories: First, the long- and short-run causal effects of stock market development on economic growth are positively significant, but bank sector development is positively insignificant, indicating the financial intermediary sector's inadequacy in resource mobilisation and allocation in Nigeria. Second, in both the long and short run, our analysis finds no correlation between economic growth and financial development. Third, the macroeconomic causal effect finance-growth variables In the long run, the nexus is found to be unidirectional, implying that crude oil price and government expenditure are the primary drivers of the Nigerian financial sector's long-term development and, as such, are among the underlying factors that determine the amount of economic activity passing through the Nigerian financial sector. The policy proposal is to make the banking sector more accessible in order to improve financial deepening, as well as to foster economic diversification rather than exclusive reliance on oil revenue.

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