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International Journal of Applied Economic Studies (ISSN:2345-5721)

Financial Market Development and Economic Growth in Nigeria: Evidence from VECM Approach

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Abstract There has been a series of intensive debate on whether financial market development has the potential to impact positively on long run economic growth of an economy. Thus, this study empirically examines the impact of financial market development on economic growth in Nigeria using annual time series data covering the period of 1981-2014. In achieving this, the study employed the Vector Error Correction Model (VECM) as the econometric methodology. The empirical results show that overall there is a positive effect of financial market development on economic growth in Nigeria. Almost, all the financial markets, namely, stock, capital and money market have been found to have a significant positive impact with the exception of only foreign exchange market having a negative impact on economic growth. On the basis of the findings of the study, it was recommended that there is a need for a comprehensive financial reform to overhaul the entire Nigerian financial system so as to boost business and investment activities in the country. The study also recommended for the establishment of effective legal framework to complement the regulatory and supervisory institutions as well as directing the financial reform and credit policy of the apex bank towards improving credit to private sector. Finally, the study recommended a more flexible foreign exchange rate policy and diversification of the export base of the country to make the forex market a positive contributor to the nation’s real GDP.

Keywords: Financial markets, Economic growth, Cointegration, Error Correction Mechanism (ECM). JEL Classification: C50, D53, G20, O43

http://sijournals.com/IJAE/wp-content/uploads/2016/06/Financial-Market-Development-and-Economic-Growth-in-Nigeria-Evidence-from-VECM-Approach.pdf