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Commercial Bank Loans, Inflation, Exchange Rate and Political Instability as Key Determinants of Economic Growth: Empirical Evidence from Nigeria (1970-2013)

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Commercial Bank Loans, Economic Growth, Foreign Exchange, Inflation, Non-oil GDP, Political Instability, Trade Dispute
  • AJIBOLA, Joseph Olusegun
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. CC BY-NC-SA 4.0 Creative Commons License:
This paper considers the impact of commercial bank loans, inflation, exchange rate and political instability on Nigeria’s economic growth for the period 1970 – 2013. It delves into the contemporary theories and literature on the relationship between bank loansand economic growth in Nigeria, using the rise in non-oil GDP as a measure of growth. However, given that economic growth is influenced by a multitude of factors apart from credit, the study introduces few other key variables of inflation, foreign exchange rate and political instability/trade dispute (measured by overthrow of governments through coups and number of disputes declared by labour unions) to measure jointly and severally the impact of the variables on aggregate growth in Nigeria. The paper examines the theoretical underpinning of the role of commercial bank lending on economic growth based on the combination of the quantity theory of money, recent growth theoriesand aggregate production function. The basic regression model adapted from the Cobb Douglas production function is defined as: Yr = aı + a2Lr + a3Br + a4Br-ı + eı Results of the linear regression show that the previous and current year’s loans and advances have positive impact on economic growth in Nigeria. Likewise, the equation shows that both foreign exchange rate and inflation rate had positive effects on Nigeria’s output growth whereas political instability had negative effect during the period of study. Generally, the findings confirm our a priori expectation of a positive correlation between commercial bank credit, inflation rate, foreign exchange rate and economic growth and an inverse relationship between political instability/trade dispute and growth of the economy.

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