INTERDEPENDENCE BETWEEN TRADE OPENNESS, FINANCIAL DEPEENING AND ECONOMIC PERFORMANCE IN NIGERIA: EVIDENCE FROM VAR AND GRANGER CAUSALITY

Abstract

The paper explored the interdependence between trade openness, financial deepening and economic performance in Nigeria within the period of 1981 and 2018 using data from World Bank Report. GDP denotes economic performance. While trade openness by net inflow % of GDP and total trade as % of GDP, whereas; financial deepening as M2/GDP and CPS/GDP all representing independent variables. The paper conducted the stationarity and the long-run test using ADF and PP and the Johannsen Cointegration Test. The result shown that all the variables are integrated at I(I) with evidence of no long-run relationship. The paper further conducts the VAR and the granger test to check for their interdependence and direction of causality. The paper uncovers that trade openness (net inflow % of GDP and total trade as % of GDP) impact economic performance. While financial deepening (as CPS/GDP and M2/GDP) exerts no impact on economic performance in Nigeria. The result further shown that there is unidirectional causality from net inflow % of GDP and total trade as % of GDP to gross domestic product in the trade openness model. And also, unidirectional causality from M2/GDP to GDP in the financial deepening model. While, the interdependence modelling reveals a unidirectional causality running from net inflow % of GDP and M2/GDP to GDP. And from CPS/GDP to total trade as % of GDP and net inflow % of GDP to M2/GDP. And finally bidirectional causality between to total trade as % of GDP and GDP in Nigeria under the period of investigation. Hence, the paper recommends that more attention should be placed on trade openness due to the growing importance of international trade rising from the interconnection of markets.