Author: Nwaimo Chilaka Emmanuel
Department: Economics
Affiliation: Nnamdi Azikiwe University Awka

Most of the studies relating banking activities and macroeconomic behavior of many nations focused on the effect of macroeconomic instability on banking sectors. This study rather examines the impact of banking instability on the Nigerian economy. Annual data were used ranging from 1980 to 2011 drawn from various data publication issues domestically and those outside the country. Variables taken into consideration in the course of analysis are those proxies to the banking instability and the Gross Domestic Product. The framework of analysis implies descriptive approach of individual data and the estimation of the Gross Domestic Product function through a dynamic error correction model. The results suggest that the variables in the model were normally distributed and there was no evidence of serial correlation. However, the study reveals that the saving rate and the interest rate adversely affect GDP. This is an indication that the consolidation policy of the central bank did not solve the problem of instability of banking activities. All the same, findings report for any long run distortion of the economy shows that equilibrium can be easily restored. A major submission of this study is that government should improve on the banking consolidation by critical review of different monetary policy actions with respect to the variables that constitute the dynamics of banking operations.

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