Trade Openness and Inflation in Nigeria: A Nonlinear ARDL Analysis

Abstract

This study investigated the relationship between trade openness and inflation in Nigeria between 1980 and 2015. It employed the nonlinear auto-regressive distributed lag (NARDL) modelling approach to co-integration based on the standard theoretical and empirical literature on trade openness-inflation relationship. Our approach allows us to simultaneously test the short- and long-run nonlinearities through positive and negative partial sum decompositions of the predetermined explanatory variables. Empirical evidence revealed that the direction of the relationship between openness and inflation is time specific. While there is a significant positive long-run relationship between inflation and trade openness, the analysis in contrast found a strong and robust negative link between openness and inflation in the short run. In addition, the obtained results indicate that trade openness affect inflation in an asymmetric and nonlinear manner. The results were found to be robust to different specifications.

Key words: Inflation, Monetary Policy, Openness, NARDL, Nigeria.

JEL Classification: E31, F41.