Domestic inflation, exchange rate, and aggregate import demand nexus in Nigeria : New evidence from cointegrating regression

This study estimates the Nigerian import demand function with the view to finding the degree of responsiveness of imports to domestic product prices while controlling for exchange rate (EXR), gross domestic product and foreign reserves. To refine inference about stationarity in the presence of structural breaks, the study employed the Lee and Strazicich and Zivot-Andrews stationarity tests, which all confirmed that the series are integrated of order one. Both the ARDL bound testing for cointegration and the Johansen cointegration approach all confirmed long-run relationship among the variables. From the cointegrating regression estimates using the Saikkonen and Stock-Watson Dynamic Ordinary Least Square procedure and the Phillip and Hansen's Fully Modified Ordinary Least Square technique, we found that imports in Nigeria are domestic inflation or cross elastic in the long run. The study, however, found import demand to be inelastic to EXR and income, same as to foreign exchange reserves. The sensitivity of these estimates was confirmed with the ARDL procedure suggested by Peseran, Shin and Smith. With the Granger non-causality test using the Toda-Yamamoto's technique, we found unidirectional causality running from domestic inflation to import demand, implying that previous values of domestic inflation offer additional information to explaining future values of aggregate import demand. Diversification of domestic production as well as other policies directed at enhancing price and quality competiveness of domestic products were recommended