Bala-Keffi, Ladi Raulatau (2021) Financial system stability and economic growth : evidence from Nigeria. (PhD thesis), Kingston University, .

Abstract

This thesis consists of five core chapters focused on investigating nonlinearities arising from state dependence, threshold and asymmetric effects in the relationship among economic growth, financial instability and financial inclusion. The first paper sets the stage by inquiring whether the relationship between financial instability and economic growth changes with the business cycle. We find that (i) there is a long run relationship between financial instability and economic growth, (ii) the relationship is sensitive to the state of the economy, (iii) given a shock to the system, the speed at which adjustment to the long run equilibrium takes place varies across different quantiles of economic growth, and (iv) the interaction term between financial instability and financial inclusion has a non-trivial effect on output growth. These results highlight the need for (i) studies aimed at investigating finance-growth nexus to consider possible non-linearities arising from state-dependence, and (ii) state-specific, rather than 'all-seasons' policies for ameliorating the negative output effects of financial instability. In the second paper, we focus on the threshold effect of financial inclusion on the relationship between financial instability and economic growth. We find evidence of a 20 per cent financial inclusion threshold below which the effects of financial stability on economic growth is neutral, and above which the relationship between financial stability and output becomes non-trivial. Also, we confirm that financial instability generates negative output effects in Nigeria. These results imply that the level of financial inclusion matters for the effect of financial instability on economic performance. In the third paper, the study presented global evidence on the nexus between financial inclusion and economic growth using 153 countries across regions and various levels of development. Using a battery of linear (random effects) and non-linear (panel threshold) models, the study found that financial inclusion has a positive impact on economic growth in all situations. The magnitudes are greater for higher income countries and are also higher in non-fragile economies compared with low income and fragile economies. Furthermore, the results reveal that the nexus between financial inclusion and economic growth remains positive even in the face of undeniable threshold (nonlinear) effects. The threshold results shows that the magnitude of the positive impact of financial inclusion on grwoth appears to rise with higher levels of financial inclusions, although it declines with higher levels of financial development. The fourth paper accommodates the effects of the debt threshold in the relationship between financial instability and economic growth. Thus, we estimate a smooth transition growth model using debt as a transition variable and found that the level of debt matters for the nature of the relationship between financial instability and economic performance. The study found that in the lower debt regime, financial instability positively affects economic performance, while in the upper debt regime, it negatively affects the economy. This confirmed the presence of asymmetry across regimes. It was also found that the optimal debt-to-GDP ratio in Nigeria is around 55 per cent. In the final paper, we investigate the causal relationship between finance and economic growth while accounting for nonlinearities arising from threshold and asymmetric effects. We find evidence of three regimes in the growth model; and show that whereas financial inclusion has causal effect on economic performance in the second and third regimes, economic growth causes financial inclusion only in the second regime. On the other hand, there is no causal relationship between financial instability and economic growth in the second regime. Furthermore, our results confirm the presence of asymmetric effects as positive and negative variations in real GDP and financial inclusion generates varied effects on financial instability. Also, positive and negative variations in real GDP and financial instability lead to different impacts on financial inclusion. However, economic growth does not respond differently to positive and negative variations in the financial sector variables. Finally, we find evidence that positive shocks to financial inclusion elicit positive response in output, and such positive response is amplified during periods of high economic growth.

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