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TRADE OPENNESS, FINANCIAL DEVELOPMENT, AND THE NIGERIAN ECONOMY
Abstract
This study investigates the relationship between changes in different variables of trade openness and financial development; and its impact on the growth rate of the Nigerian economy. Annual time series data for the period 1981-2013 by the Central Bank of Nigeria was used to estimate both long and short-run relationship as well as causal effects. The Unit root test shows that the variables were stationary at level and after being first differenced; at the 5% significance level. The Johansen Co integration test gave evidence of four co-integrating equations which explains that a long-run equilibrium relationship exist among the variables. The Vector Error Correction Model was used to analyze short-run adjustment dynamics and showed 96.7% speed of adjustment of prior deviations from equilibrium. The Granger Causality test demonstrated both bi-directional causality between real effective exchange rate and total trade; and uni-directional causality from gross domestic product to total trade, gross domestic product to credit to the private sector, total trade to foreign direct investment, total trade to credit to the private sector and real effective exchange rate to foreign direct investment. Furthermore, the Impulse Response and Variance Decomposition test indicate both positive and negative shocks which are consistent with our findings from the vector error correction model and Granger causality analysis. Overall, all the results obtained are in line with apriori expectations. Key policy directions are: flexibility in loans policies and interest rates by financial institutions to encourage lending to the real sector; more reforms in our foreign policies in order to attract more foreign direct investments; more regulations in the financial sector to forestall bankruptcy and corruption and the practice of all-inclusive democratic principles.
Keywords: Terms of Trade, Foreign Direct Investment, Real Effective Exchange Rate, Credit to the Private Sector, Growth Rate.