Unraveling The Nexus: Capital Flows Dynamics, Financial Sector Stability and Their Impact on Economic Development in Nigeria

Abstract

Capital flows Dynamics, Financial sector stability and their impact on Economic development in Nigeria was carried out using data from 1986 to 2022. This study attempted to find out the effect of the relationship between financial sector stability variables and capital flows on economic development in Nigeria. The ARDL Error Correction regression analysis was used to test the short run and long run relationship capital outflow and financial sector stability on economic development. The study found out that capital flow variables (NPI and NDI) negatively but significantly affect economic development while financial sector variables (CPS and NIM) exhibited a negative and insignificant relationship with economic development. The study concluded that the influence of capital flows is dependent upon a nation’s degree of financial development. A more open capital account has a detrimental impact on performance for nations with low levels of financial development. The study therefore recommends that the policy makers in Nigeria should strike a balance between attracting foreign investment and ensuring that it aligns with broader economic development goals and ensure that credit is directed towards productive sectors that contribute to economic development.