Inflation - Economic Growth: Does Financial Deepening in Nigeria Matter?

Abstract

This study investigated the relationship amongst inflation, economic growth and financial deepening in Nigeria over the period 1990 to 2025. Using annual time-series data on key macroeconomic and financial variables, sourced from Central Bank of Nigeria (CBN) Statistical Bulletin, the World Bank's World Development Indicators (WDI), the International Monetary Fund's International Financial Statistics (IFS), and the Nigerian Exchange Group (NGX) annual reports. Two ordinary least squares (OLS) regression models were adopted. Model 1, examined the impact of financial deepening indicators and the MPR on inflation, while Model 2, assessed the effects financial deepening on real GDP growth. The findings revealed that financial deepening, as proxied by M2/GDP exerted a positive and statistically significant effect on both price stability and output growth. DCPS/GDP signed positive and statistically significant effect on output, but insignificant on price. The MPR demonstrated a negative and statistically significant effect on both inflation control and output, while stock market development (MCP) positively amplified monetary transmission to real sector activity. The study concluded that the CBN's monetary policy instruments are effective but operate within structural constraints, most notably fiscal dominance, supply-side bottlenecks, and a relatively shallow financial system that limit their reach. The study recommended amongst others that strengthening the central bank's operational independence and establishing a robust fiscal-monetary coordination framework would help decouple monetary expansion from deficit financing, thereby moderating the inflationary consequences of financial deepening, and adoption of rapid credit expansion with commensurate improvements in productive capacity to avoid the risks translating into price pressures for output gains to be actualized.