An Empirical Test of the Demand-following Hypothesis (DFH) in Nigeria

Babatunde Olufemi Oke

Babatunde Olufemi Oke University of Lagos

Keywords: Economic Growth, Financial Development, Structural Vector Autoregressive (SVAR), Bayesian VAR (BVAR), Vector Error Correction (VEC) model

Abstract

The role of financial development in economic growth has been settled in the literature. Still unsettled, however, is the Demand Following Hypothesis (DFH) that economic growth promotes financial development. This study investigates the veracity of this claim by applying the Structural Vector Autoregressive (SVAR) specification, the Bayesian Vector Autoregressive (BVAR) technique, and the Vector Error Correction (VEC) model to Nigerian data from 1986 to 2016. The DFH is invalidated in this study as results show that economic growth does not predict financial development in Nigeria during the period under review. Policy makers in Nigeria should therefore emphasize other variables when promoting financial deepening in the country.