Effects of trade and financial openness on inflationary pressure in Nigeria

Abstract

The continuous rapid upsurge in inflationary pressure in Nigeria amidst the gradual liberalisation of the country’s trade and financial market calls for questioning of the role of trade and financial openness in the inflationary trend in Nigeria, which makes the research on this issue relevant. The purpose of this study was to determine the effects of trade and financial openness on inflation in Nigeria. In the estimation of the model built to capture the objective of the study, the fully modified ordinary least squares was employed based on the data collected from the World Development Indicators covering the period of 1981 to 2023. The results showed that trade openness and exchange rate exerted a significant negative effect on inflation in Nigeria while exchange rate showed a significant positive effect. The study concluded that financial openness had a positive significant effect on inflation while trade openness and exchange rate exerted a significant negative effect. The need for government to review their foreign trade policies in such a way that the importation of both finished and intermediate goods and services from the rest of the world can be significantly reduced by boosting local production was recommended. The study offers two-folds contributions. It provides new information on the factors that determine inflation and it specifically shows the nexus among trade and financial openness. The findings therefore revealed that higher trade and financial openness raises inflation implying openness-induced inflation. The findings from the study will be of practical value to policy makers such as those in the fiscal authorities and the Central Bank of Nigeria in devising policies to tame the current inflationary pressure in Nigeria.