Financial Development, Trade Openness, and Economic Growth in Nigeria

Abstract

This study examined the impact of financial liberalization and trade openness as well as their interactive effects on the growth of the Nigerian economy using annual time-series data for the period, 1981 to 2018. The results of the Augmented Dickey-Fuller (ADF) unit root test show that all the variables are stationary at the first difference and the Johansen cointegration test results confirm the existence of a long-run relationship among the variables in the model. Two equations were specified and estimated using the dynamic ordinary least square (DOLS) estimation technique and the granger causality test was carried out. The results reveal that financial development, exchange rate, and interest rate spread have a significant influence on real GDP in Nigeria while trade openness, as well as its interaction with financial development, do not exert any significant impact on economic growth in Nigeria. Further, this study supports the demand-following and trade-led growth hypotheses. Hence, this study recommends the design and implementation of a policy framework geared towards enhancing the intermediation efforts and deposit mobilization of the financial sector that would instigate the integration of the sector with the various productive sectors of the Nigerian economy and that trade performance in the country to be improved through economic diversification so as to boost exports, raise the country competitiveness and increase her national output.

Keywords: Financial Development, Trade Openness, Economic Growth, Dynamic OLS, Nigeria

JEL Classification: C22, F10, G20, O40