Finance-Led Growth and Growth-Led Finance: Evidence from Nigeria Economic and Financial Sector Development

Abstract

This study investigates the cause-effect relationship between financial sector development and economic growth; in Nigeria through supply-led growth and demand-led growth models. Annualized time-series data extracted from the Central Bank of Nigeria Bulletin from 1999 to 2017 were used in the investigation. The supply-led growth model assumes that financial sector development granger causes economic growth. The demand-led growth model assumes that economic growth Granger causes financial sector growth. Estimating the cause-effect relationship the Autoregressive Distributed Lag (ARDL), and Pairwise Granger Causality was adopted. Findings revealed that the causal relationship is influenced by the stages and level of economic and financial sector growth through the appropriate policy mixes, of the regulators and monetary authorities. The Error Correction Model (ECM) adjusts for disequilibrium caused by the financial and economic factors of lack of economic value, chain effect of export goods, saving-investment gap, and decrease in capital productivity, back to equilibrium at 37% annually. Both the supply-led growth and demand-led growth models hold in Nigeria. The findings differ from previous studies in Nigeria and report that the causality between finance and economic growth is based on stages and the level of economic and financial sector growth and development. The study also supports the argument of Patrick (1966).