Bounds Testing Approaches to the Analysis of Macroeconomic Relationships In Nigeria

Abstract

The main objective of the paper is to estimate the dynamic interrelation among the macroeconomic variables viz., real output, money supply, government expenditure, inflation, exchange rate, interest rate, trade openness and financial deepening using annual data for Nigeria covering the period from 1970 to  2013 using ARDL approach to cointegration. The bounds test revealed that there exists a long-run relation between real output, money supply, interest rate and exchange rate when the price and financial deepening variables were the dependent variables. However, reverse cointegration relationships were not found when real output, money supply, government expenditure, exchange rate, interest rate and trade openness were the dependent variables. This study finds feedback effect from the short run dynamics between government spending and money supply, trade openness and government spending, trade openness and real output, trade openness and financial deepening, real output and financial deepening, and finally financial deepening and nominal effective exchange rate. Furthermore, the short run dynamics revealed a unidirectional causality from money supply to inflation, from government spending to exchange rate and to financial deepening, and from interest rate to financial deepening. The policy implication that can be deduced from the above findings are: Interest rate will not serve as an efficient intermediate target for the monetary policy; policy should be geared towards promotion of international trade and financial development; government spending should be checked especially extra budgetary spending in order to reduce money in circulation and subsequently control inflationary tendency in the economy.

Keywords: Real Output, Money, Price, Interest Rate, Exchange Rate, ARDL

JEL Classifications: E41, E52, C22