Financial Deregulation and Economic Growth in Nigeria: Evidence from Error Correction Model

This paper examines the effect of financial deregulation on economic growth in Nigeria using annual data from 1986 to 2016. An index was used to capture financial deregulation. The index was generated using Principal Component Analysis from six variables namely: bank denationalisation, restructuring and interest rate liberalisation, prudential regulation, directed credit abolition, free entry into banking and capital market liberalisation. Johansen Cointegration test and Error Correction Model (ECM) were used to analyze the effect financial deregulation on economic growth. The result shows that there is long run relationship between financial deregulation and economic growth. Furthermore, the result reveals that financial deregulation has positive effect on economic growth both in the short run and long run, but the effect is not significant in the short run. The error correction term shows that the model corrects its short run disequilibrium by 35% annually.