Abstract

This paper investigated the nexus between financial sector development and economic growth in Nigeria The paper used the Principal Component Analysis PCA Autoregressive Distributed Lag Model ARDL Structural Break Test and the Pairwise Granger Causality Test PGC to examine the effect of financial development on economic growth in Nigeria and to establish which theory holds for Nigeria between the demand-following and the supply-leading theory Annual time series data between 1981 and 2016 is used for the study Data on real gross domestic product broad money supply GDP inflation credit to the private sector GDP total liquid liabilities total stocks shares traded and total stock market capitalization are obtained from the yearly publication of the Central Bank of Nigeria CBN statistical bulletin The structural break unit root test revealed that all the variables are stationary at their first difference except for inflation that was stationary in its level form the bound test cointegration analysis established the existence of long run relationship among the variables The ARDL revealed that financial development negatively and insignificantly affected economic growth in Nigeria during the period of study Furthermore the pairwise Granger causality found evidence in support of the supply-leading theory Therefore the paper recommends that more attention should be paid to growth-driven policies because it will bring about financial sector stability in Nigeria