Financial Development, Trade Openness, and Economic Growth in Nigeria: A Bounds Testing Approach

The finance-growth nexus is one of the most studied relationships in development economics, yet its interaction with trade openness in a resource-dependent economy like Nigeria introduces additional complexity that the extant literature has not fully resolved. This study examines the joint effects of financial development and trade openness on economic growth in Nigeria using annual time-series data from 1990 to 2022. Financial development is measured through a composite index combining private sector credit depth, stock market capitalisation, and banking sector efficiency indicators, constructed using principal component analysis from data sourced from the Central Bank of Nigeria and the World Bank Financial Development Database. Trade openness is measured as total trade as a percentage of gross domestic product from the National Bureau of Statistics. The autoregressive distributed lag bounds testing approach is employed to test for cointegration and estimate both short-run and long-run coefficients while the structural stability of estimates is verified using the cumulative sum and cumulative sum of squares tests. The theoretical framework integrates the financial liberalisation-growth hypothesis, the vent-for-surplus theory of trade and growth, and the endogenous growth model. The study also tests for non-linear threshold effects in the finance-growth relationship using the smooth transition regression model, addressing the hypothesis that financial deepening may have diminishing or even negative growth effects beyond a certain level. Existing literature on Nigeria yields mixed results due to methodological differences and varying sample periods. This study provides a methodologically updated and comprehensive analysis with findings relevant for the Federal Ministry of Finance, the Central Bank of Nigeria, and the World Trade Organisation's Nigeria engagement programme. Keywords: financial development, trade openness, economic growth, ARDL bounds test, Nigeria