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Purpose: This paper explores the relationship between financial development and output of the service sector in Nigeria over the period 1981-2019. It presents an analysis of the long-run and short-run impacts of financial development on the performance growth of the service sector, as well as the cointegration between the variables.
Approach/Methodology/Design: We test the time series for stationarity using Phillips-Perron and Augmented Dickey-Fuller unit root tests. We adopt the Auto-Regressive Distributed Lag (ARDL) approach to analyze the relationship between financial development and service sector performance in Nigeria. Market capitalization, monetization ratio, and the ratio of credit to the private sector to GDP represent the indicators of financial development.
Findings: The results of the study show that market capitalization and monetization ratio have significant positive impacts on service sector output, respectively. However, the effect of credit to the private sector on service sector performance is insignificant and negative. We find no cointegration among the investigated variables; while, the result of the error correction estimation indicates that it takes about two years to restore the long-run equilibrium after a deviation. In light of the findings made, this paper concludes that financial development exerts a significant positive effect on service sector performance in Nigeria.
Practical Implications: This study is valuable at this period of economic uncertainties in Nigeria. With input from this paper, policymakers in the public sector via the formulation and implementation of effective policy measures such as fiscal measures can channel the benefits of financial sector development to the service sector to create an enabling business environment for the sector, especially as it concerns the provision of private credit to the sector.
Originality/value: Based on literature review, this paper for the first time investigated the link between financial development and the performance of the service sector in Nigeria as defined by the CBN Statistical Bulletin 2019 edition.
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