Causal Relationship between Banking Sector Development and Foreign Investment Inflows Volatility in Nigeria (2008-2014)
Benjamin Ayodele Folorunso, Department of Economics, Obafemi Awolowo Univeristy, Ile-Ife, Nigeria.
Oluwatosin Olusola Adesina, Department of Economics, Obafemi Awolowo Univeristy, Ile-Ife, Nigeria.
The paper aimed at testing the possibility of a causal relationship between banking sector development and foreign Investment inflow volatility in Nigeria from the period of the most recent financial crises of 2008 to 2014 using Toda and Yamamoto (1995) causality test. The result showed that there exists a unidirectional causal relationship from foreign direct investment volatility to banking sector efficiency also; there exists a unidirectional causal relationship from banking sector access to foreign direct investment volatility in the years under investigation. Also, a unidirectional causal relationship exists from the various indicators of banking sector development (banking access, banking efficiency and banking stability) to foreign portfolio investment volatility (except for banking sector depth with no causal relationship). However, there was no causality found between other foreign investments and banking sector development. The paper concluded therefore that, there exist a causal relationship between banking sector development and foreign investment inflows volatility in Nigeria.
Banking Sector Development, Capital Inflow Volatility, Toda-Yamamoto Causality
Aghion, P.; Bacchetta, P. and Banerjee, A. (2004), Financial Development and the Instability of Open Economies, Journal of Monetary Economics, 51(6): 1077-1106.
Alfaro, L. and Kalemli-Ozcan, S. (2005), Capital Flows in a Globalized World: The Role of Policies and Institutions, NBER Conference on Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, December, 17-18, 2004.
Alfaro, L.; Sebnem, K. and Volosovych, V. (2005), Capital Flows in a Globalized World: The Role of Policies and Institutions, Prepared for the NBER Conference on Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, December, 17-18, 2004.
Ayadi R.; Arbak, E.; Naceur, S. B. and De Groen, W. P. (2013), Determinants of Financial Development across the Mediterranean prospects, Technical Report No. 29/February, 2013.
Beck, T.; Demirguc-Kunt A. and Levine R. (2000), A New Database on Financial Development and Structure, World Bank Economic Review, 14, 597-605.
Beck, T.; Demirguc-Kunt A. and Levine R. (2009), Financial Institutions and Markets across countries and over Time: Data and Analysis, World Bank Policy Research Working Paper Series, No. 4943.
Becker C. and Noone C. (2009), Volatility in International Capital Movements, Reserve Bank of Australia, Research Discussion Paper, 2009-09, December, 2009.
Blöndal S. and Christiansen H. (1999), The recent experience with capital flows to emerging market economies, Organisation for Economic Co-operation and Development, Economics Department Working Papers, N0. 211.
Broner, F. A. and Rigobon R. (2004), Why are capital flows so much more volatile in emerging than in developed countries? Eight Annual Conference of the Central Bank of Chile, “External Financial Vulnerability and Preventive Policies,” Santiago, Chile, August 10 and 11, 2004.
Broto, C. Díaz-Cassou, J. and Erce-Domínguez, A. (2007), “The Sources of Capital Flows Volatility: Empirical Evidence for Emerging Countries”, Banco De España, Madrid Documentos de Trabajo.
Broto, C.; Díaz-Cassou, J. and Erce-Domínguez, A. (2008), Measuring and Explaining the Volatility of Capital Flows towards Emerging Countries, Banco De España, Madrid Documentos de Trabajo, No. 0817.
Do, Q. T. and Levchenko A. A. (2007), Comparative Advantage, Demand for External Finance, and Financial Development, Journal of Financial Economics, Vol. 86, No. 3, pp. 796-834.
Forbes, K. (2012), Capital Flow Volatility and Contagion: A Focus on Asia, mimeo, MIT.
Fratzscher, M. (2011), Capital Flows, Push versus Pull Factors and the Global Financial Crisis, NBER Working Paper, No. 17357.
Guo, L. (2008), Capital flows and the financial development: will the financial globalization be a solution or a problem for emerging countries? Maison des Sciences Economiques, CES-EUREQua, 106-112, boulevard de l. Hôpital, 75647 PARIS Cedex 13, France.
Hagen, V. J. and Zhang, H. (2007), Financial Development and International Capital Flows, SMU Economics and Statistics Working Paper Series, No.16-2007.
Hagen, V. J. and Zhang H. (2009), International Capital Flows and World Output Gains, IMF working paper.
Hagen, V. J. and Zhang H. (2014), Financial Development, International Capital Flows, and Aggregate Output, Journal of Development Economics.
Hoggarth, G.; Jung, C. and Reinhardt, D. (2016), Capital inflows – the good, the bad and the bubbly, Bank of England, Financial Stability Paper No. 40, October 2016.
Huang, Y. and Temple, J. (2005), Does external trade promote financial development?, CEPR Discussion Papers, No.5150.
Iganiga, B. O. (2010), “Evaluation of the Nigerian financial sector reforms using behavioral models,” Journal of Economics, 1(2): 65-75.
Knight, M. D. (2016), Capital Flows to Emerging Market Economies: Feast or Famine Forever?, Centre for International Governance Innovation, Canada, Papers No. 96, March, 2016.
Law, S. H. and Azman-Saini W. N. W. (2008), The Quality of Institutions and Financial Development, MPRA Paper, No. 12107, Munich Personal RePEc Archive.
Lucas, Robert (1990), Why Doesn’t Capital Flow from Rich to Poor Countries? American Economic Review, 80, 92–96.
Milesi-Ferretti, G. M. and Razin, A. (2000), Current Account Reversals and Currency Crises, Empirical Regularities, in Paul Krugman, ed. Currency Crises. Chicago: University of Chicago Press.
Nigeria Deposit Insurance Corporation (NDIC) (2007), Annual Reports and Statement of Accounts.
Omankhanlen, A. E. (2012), The Financial Sector Reforms and Their Effect on the Nigerian Economy, Transdisciplinarity Cognition Vol. 15, Issue 2/2012, p 45-57.
Prasad, E. and Rajan, R. (2008). A Pragmatic Approach to Capital Account Liberalization, 66 Research Collection School of Economics.
Soludo, C. C. (2006), Can Nigeria be the China of Africa? Lecture Delivered at the University of Benin Founders’ Day, November 2006, P.14.
Toda, H. and Yamamoto, T. (1995), Statistical inference in vector autoregressions with possibly integrated processes, Journal of econometrics, 66(1-2), 225-250.
Williamson, J. (2005), Curbing the boom-bust cycle: stabilizing capital flows to emerging markets, Institute for International Economics, Washington DC.