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CAUSALITY BETWEEN MONETARY EXTENDING AND FINANCIAL DEVELOPMENT IN NIGERIA: PROOF FROM A BOOTSTRAP MOVING WINDOW APPROACH
Abstract—This paper investigates the role of financial development on economic growth in Nigeria. Since a causal link may evolve over time, a bootstrap rolling window approach is used to account for potential time variation in the relationship with annual Nigerian data on money supply as a ratio of nominal GDP and real GDP per capita from 1961-2012. Starting first with a full sample bootstrap Granger causality, the results indicate no causality between the two series. The relevant VAR is unstable for the full sample which undermines the confidence in the bootstrap full sample Granger causality tests. Therefore a bootstrap rolling window estimation was used to evaluate Granger causality between financial deepening and economic growth over different time periods. These tests reveal periods where financial deepening has predictive power for economic growth: 1973-1974 and 1976 as well as periods where economic growth has predictive power for financial deepening: 1980-1982, 1985-1986, 1995-1996, 1998, 2000, 2004 and 2008-2011. These results highlight the risk of misleading conclusions based on the standard Granger causality tests which neither accounts for structural breaks nor time variation in the relationship between financial deepening and economic growth.
Index Terms—Bootstrap, economic growth, financial deepening, time varying causality.