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Abstract

This study examines the effect of public debt on financial development between 1981 and 2016 using Dynamic Ordinary Least Square (DOLS). The focused variables are financial development and public debt. The ratio of private credits to GDP, the ratio of broad money, M2 to GDP and the ratio of commercial bank asset to the sum of commercial bank asset and Central Bank asset are used to measure financial development which is the dependent variable. The control variables include GDP deflator, lending rate, gross fixed capital formation, and government expenditure. ADF and PP tests of the unit root are used followed by the test of cointegration using Johansen and Juselius’s test. The DOLS results indicate that public debt has a positive effect on financial development in Nigeria. This, therefore, supports the safe asset view. Thus, public borrowing which serves as a safe asset for financial intermediaries will encourage lending to the private sectors which will increase financial development and ultimately economic growth. Furthermore, if government borrowing and private credit are channeled to the productive sector of the economy, the economy will grow which will ultimately promote economic development in Nigeria.