The non-linear relationship between financial development, economic growth and growth volatility: Evidence from Nigeria

Abstract

The aim of this paper is to examine how Financial development correlates with economic growth and growth volatility in Nigeria. We use a semi-parametric partially linear model and sample splitting threshold models to analyse Nigeria data from 1970 to 2015. Our results show U-shape for both financial development (FD) and economic growth (EG) and financial development and growth volatility (GV) relationships. We report points of inflexion in FD/EG function to be 15.62% and 8.71% for the FD/GV function. We interpret these points in FD/EG as the ratio of private credit to GDP that triggers growth, and in FD/GV as a point where growth volatility is triggered. We discussed the policy implications of our findings and suggest policy reforms.