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Abstract

This study seeks to examine whether financial development spurs productivity growth when the exchange rate is unstable. In this study, annual series data that spans between 1981 and 2017 was used. Three measures of financial development namely credit to private sector as a share of GDP, M2 as a share of GDP and Market capitalization as a share of GDP were also employed. Exchange rate instability was measured as the annual standard deviation of the log difference of monthly multilateral real exchange rate. Bound testing approach to co-integration is used to ascertain for the existence of a longrun relationship. Afterwards, the Ordinary Least Squares (OLS) estimation technique was adopted to examine the effect of exchange rate instability and financial development on productivity growth in Nigeria. Our findings show that financial development cushions the adverse effect of exchange rate instability on productivity growth in Nigeria. The result is robust to the various measures of financial development. Our study points out that for a country with flexible exchange rate regime experiencing significant fluctuation in exchange rate, a well-developed financial sector could minimise the adverse effect of exchange rate instability on productivity