An Empirical Investigation into the Effect of Financial Sector Development on Consumption and Inflation in Nigeria: 1986-2012

Private consumption expenditure is one of the largest components of aggregate expenditure in Nigeria. It constitutes about 72% of GDP over the period understudy. It is therefore an important aspect of the macro-economy of any nation. In the same vein inflation has been a persistent evil affecting the economy of Nigeria. So they are both required to have a deep understanding of how macro-economy functions. The determinants of these two aggregates can therefore not be divorced from the activities in the financial sector. Hinging on the Keynesian absolute income consumption hypothesis, the paper used 3 SLS to estimate the two macroeconomic equations. The results showed that money supply, market capitalization and exchange rate had positive impact on personal consumption expenditure. However, it is only market capitalization that is not statistically significant. All the financial variables used—money supply, interest rate and exchange rate had positive relationship with the general price level. However it was only exchange rate that was not statistically significant. The paper concluded that shocks in the financial sector explained the variations in personal consumption and inflation. It was therefore recommended that interest rate and exchange rate should not be absolutely left to the dictate of the market forces. Government should intervene occasionally as the case may demand. Conducive environment that will make activities in the capital market should be encouraged.