On the Causality between Domestic Credit Aggregates and Economic Growth in a Multivariate VAR Framework: Evidence from Nigeria

The major objective of this paper is to empirically investigate the relationship between domestic credit and economic growth in Nigeria, using annual time series data from 1970 to 2012. In order to do this, the study employs KPSS unit root test, Johansen cointegration test, VAR modeling, impulse response function, variance decomposition and granger causality. Firstly, the findings reveal that there is a bi-directional causality and positive relationship between domestic credit and the economic growth in Nigeria. That is, domestic credit does not only contribute positively to economic growth in Nigeria, but the impact is strong and statistically significant. The findings have a strong implication on financial policy in Nigeria. The major implication is that an efficient financial system is one of the foundations for building sustained economic growth. Considering regulations, institutional constraints and other macro-economic factors militating against domestic credit in the economy, government should make the environment conducive and supportive so that performance is enhanced and good lending behaviour guaranteed.