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Investigating Causal Relationship between Financial Development Indicators and Economic Growth: Toda and Yamamoto Approach

Author

Listed:
  • Oluyemi Adewole Okunlola

    (University of Medical Sciences, Ondo City, Nigeria.)

  • Emilomo Omons Masade

    (Maslomo Auto and Company Limited, Ondo State, Nigeria.)

  • Adewale Folaranmi Lukman

    (Landmark University, Omu Aran, Nigeria.)

  • Samuel Ajayi Abiodun

    (Landmark University, Omu Aran, Nigeria.)

Abstract

The Causal relationship between financial development and economic growth has received divergent views in the literature under the traditional Granger approach to causality using data from various countries. The more recent Toda and Yamamoto and Dolado and Lütkepohl (TYDL) approach to causality were used to investigate the causal relationship between financial development and economic growth in Nigeria for the period 1985 to 2015. TYDL is based on an augmented VAR modeling and it is adjudged more robust to order of integration of the variables when compared with Granger framework. The maximum order of integration was two while the optimal lag length of three was selected by FPE, AIC and HQ criteria. Bi-directional causality was found between financial markets indicators and economic growth while unilateral causality running from stock market indicators to GDP was established. The findings support existing studies that agree with the fact that a well-structured financial sector breeds economic growth and this by implication suggests, it is imperative for the government of Nigeria and other developing countries to create an atmosphere for a thriving financial sector and engage in reforms that will stimulate the economy.

Suggested Citation

  • Oluyemi Adewole Okunlola & Emilomo Omons Masade & Adewale Folaranmi Lukman & Samuel Ajayi Abiodun, 2020. "Investigating Causal Relationship between Financial Development Indicators and Economic Growth: Toda and Yamamoto Approach," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 24(1), pages 225-246, Winter.
    • Handle: RePEc:eut:journl:v:24:y:2020:i:1:p:225
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    Cited by:

    1. Brou Emmanuel AKA, 2023. "Revisiting the finance-growth nexus in Nigeria using frequency domain approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(637), W), pages 265-280, Winter.
    2. Brou Emmanuel AKA & Yao Silvère KONAN, 2023. "Frequency domain causality analysis of financial development and economic growth in Côte d’Ivoire," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(635), S), pages 163-182, Summer.

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