Domestic inflation, exchange rate, and aggregate import demand nexus in Nigeria: New evidence from cointegrating regression

Abstract

This study estimates the Nigerian import demand function with the view to finding the degree of responsiveness of imports to domestic product prices while controlling for exchange rate (EXR), gross domestic product and foreign reserves. To refine inference about stationarity in the presence of structural breaks, the study employed the Lee and Strazicich and Zivot‐Andrews stationarity tests, which all confirmed that the series are integrated of order one. Both the ARDL bound testing for cointegration and the Johansen cointegration approach all confirmed long‐run relationship among the variables. From the cointegrating regression estimates using the Saikkonen and Stock‐Watson Dynamic Ordinary Least Square procedure and the Phillip and Hansen's Fully Modified Ordinary Least Square technique, we found that imports in Nigeria are domestic inflation or cross elastic in the long run. The study, however, found import demand to be inelastic to EXR and income, same as to foreign exchange reserves. The sensitivity of these estimates was confirmed with the ARDL procedure suggested by Peseran, Shin and Smith. With the Granger non‐causality test using the Toda‐Yamamoto's technique, we found unidirectional causality running from domestic inflation to import demand, implying that previous values of domestic inflation offer additional information to explaining future values of aggregate import demand. Diversification of domestic production as well as other policies directed at enhancing price and quality competiveness of domestic products were recommended.

Simulating the macroeconomic impact of expansion in total government expenditure on the economy of Nigeria

“…(2020) and Zhou et al. (2020), the FDI equation is expressed as a function of exchange rate volatility, inflation, world interest rate (WINTR), trade policies (proxied by import tariff), openness, trade flows, and exchange rate volatility as the key determinants. Similarly, the key determinants of trade flows in the literature include exchange rate volatility (Guisan and Cancelo 2002; Wood and Mayer 2001; Daramola 2013; Umoru and Odjegba 2013) and trade openness (proxied by import tariff).…”

“…(2020) and Zhou et al. (2020) are unanimous in their submission that the deteriorating and volatile exchange rate confronting Nigeria over the years, coupled with its mono‐product nature, has rendered the economy more susceptible to foreign shocks, with attendant spillover impact on the domestic economy. Also, a recent study by George‐Anokwuru and Ekpenyong (2020) establish an insignificant relationship between government spending and inflation in Nigeria for 1999–2019 in the short run, but negative and significant relationship in the long run, using ARDL bound testing approach.…”

“…The price block consists of three equations (consumer price index[CPI], monetary policy rate [MPR], and exchange rate volatility [EXRV] equations). FollowingBature et al (2020),Zhou et al (2020), and Bayo (2005), the CPI equation is expressed in equation 3, where CPI is a function of broad money supply (MS), real domestic interest rate (RINTR), trade flows, protectionist policy, proxied by import tariffs and exchange rate volatility. The MPR is modelled as a function of broad money supply, foreign reserve (F res ), inflation (INF), trade flows (TF), and nominal exchange rate volatility in equation 4.…”

Modelling Asymetries Among Consumer Price Index, Currency Price, Gross Domestic Output and Aggregate Import Demand in an Emerging Economy: The Case of Nigeria

“…For most sub-Saharan countries, it has long been isolated that currency price fluctuations impact some aspects of growth including investment. Arize and Osang (2007) established the negative influence of real exchange rate instability on the investment in their study of 14 African economies Another related area that has caught research attention within the broad subject of international trade elasticities has been the focus on the responsiveness of imports to adjustments in income and domestic inflation (see Zhou, Iormom, Azhar & Peng, 2020;Arize & Nappani, 2010). A fairly large body of literature has also analyzed the influence of foreign exchange reserves on import volume.…”

Reconsidering the nexus between monetary policy and economic growth in Nigeria: The role of interest rate, money supply, and financial inclusion

“…But this assertion holds more for developed than developing economies of the world. Literature has also identified financial intermediaries (Dabwor et al, 2020;Abbas et al, 2019;Adolfo et al, 2018), the degree of financial development (Darracq et al, 2016), exchange rate (Duval, et al, 2021;Zhou et al, 2020;Gisaor et al, 2014), and financial inclusion ( Diez et al, 2018) as veritable mediums of monetary policy transmission variables.…”