The Asymmetric Influence of Exchange Rate and Inflation on Financial Development in Nigeria: Evidence from NARDL

Abstract

This paper examined the asymmetric effects of exchange rate, and inflation on financial development growth using a model enhanced with oil prices asymmetry to apprise model specification. The research question that has been used implies, do the changes in their asymmetry significantly influence financial development? We employed nonlinear auto-regressive distributive lag (NARDL). In addition, we used the monthly data from 1980M01 to 2018M12. We found a long-term negative shock in exchange rate, both short run positive shock and negative shocks, respectively, declining the financial development. Additionally, the long run negative oil price shock and its long-term positive shocks stimulate and decline financial development, respectively. Regarding inflation, its positive and negative shocks in long run, respectively, reduce financial development. While in the short run the negative and positive shock in inflation increase and decline the financial development respectively. Accordingly, the results demonstrate a stable and sustainable inflation and exchange rate environment that would negatively cause financial development to stabilize the oil price and enhance the robust financial system. Therefore, successful policies that promote low inflation and exchange rates, overhaul of reliably improved financial institutions, capital accumulation, and efficient resources mobilization should be put in place for positive financial development to occur.