Greener Journal of Economics and Accountancy Vol. 6 (2), pp. 012-025, September 2017
ISSN: 2354-2357 © 2017 Greener Journals
Manuscript Number: 083117116
External Sector Variables and Macroeconomic Stability in Nigeria: ARDL-Error Correction Approach
Nwaeze, Nnamdi Chinwendu
Department of Economics, Abia State University, Uturu
This study examines possible causal relationships between external sector variables and macroeconomic stability in Nigeria using the Autoregressive Distributed Lag (ARDL) approach to cointegration and error correction analysis over the period 1981 to 2016. Firstly, the causal effect of external debt stock is positive and insignificant on economic growth and negative and insignificant on inflation in the long-run and short run. The results confirm the weakness of key external sector variable in driving economic activities in Nigeria and highlights the unique case of underutilized fund from abroad. Secondly, the causal effect of exchange rate is found to be positive and significant in the long run and short run. Thirdly, the causal effect of FDI is found to be negative and insignificant on economic growth but exerts positive and significant effect on inflation suggesting the dominant role of FDI in driving macroeconomic stability in Nigeria. Finally, trade openness exerts mixed causal effect on macroeconomic stability. This study concludes that external sector variables exert mixed causal effects on macroeconomic stability in Nigeria. This conclusion is premise on the results identifying real exchange rate and FDI among the underlying factors that determine the amount of economic activities and the rate of inflation passing through the Nigerian economy. The study recommends harmonization of the multiple exchange rate windows into a single window to enhance trade openness.
Keywords: Trade openness, macroeconomic stability, economic growth, inflation, foreign direct investment.
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