This paper explored the extent to which financial instability impacts on sustainable economic growth in Nigeria. Specifically, it identified the particular financial instability indicators that severely impede the growth of the economy. To evaluate the objectives, the variables were tested for stationarity and since they were not integrated of the same order, Vector Autoregression, impulse response and variance decomposition analyses were appropriately employed. The result of the analyses shows that broad money velocity (M2/GDP) and money supply errors (MSERROR) significantly reduce the growth of the economy. In other words,the growth of the economy is a negative and significant function of broad money velocity and CBN money supply errors while stock market prices, Exchange rate, Inflation mis-targeting and banking system return on asset (ROA) exert negative but insignificant impact on economic growth. The result of the impulse response analyses suggest that the level of money stock velocity has dominantly made negative significant impact on real GDP and also revealed that RGDP responds negatively to a shock in CBN money supply mismatch. Thus, all indications emanating from our findings reveal that instability in the Nigerian financial sector impct negatively and insignificantly on economic growth. In other words, financial instability deteriorates the growth of the economy. The researchers therefore call on the Central bank of Nigeria not only to adopt appropriate broad money velocity for the country, but to also narrow its money supply mistargeting if financial instability in Nigeria should be reduced to boost economic growth.
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