Trade Openness and Output Variability in Nigeria: Implications for EU-ACP Economic Partnership Agreement

Abstract

Nigeria’s potentials in international trade are hobbled by so many constraints including high cost of doing business; inadequate infrastructure; poorly implemented incentives (fiscal and tariff regimes); massive smuggling; lack of standardization; and unfavorable international trade rules and practices. Nigeria, perhaps with the intention of overcoming these problems, attempted to open up the economy through bilateral free trade arrangements such as AGOA, ECOWAS-CET, and the on-going EU-ACP economic partnership agreement. These arrangements, depending on Nigeria’s offensive and defensive could be vulnerably expose to external shocks. This paper examines the extent to which trade openness affects output volatility as a mirror of the likely implications of free trade arrangement between Nigeria and the EU. EGARCH-M(1,1) multivariate model was used; and the result shows that non-oil revenue and household spending volatility have stabilizing effect, while openness and oil revenue, government spending, exchange rate, private investment volatility and monetary policy rate are pro-cyclical.

Keywords: Nigeria, European Union, economic partnership agreement, output volatility, multivariate EGARCH-M