Imports-Exports Demand Functions and Balance of Payments Stability in Nigeria: A Co-integration and Error Correction Modeling

Abstract This paper assesses the determinants of import and export demand functions. The object is to empirically measure the relative strengths and weaknesses of the determinants import and export, and to examine, using the Marshall-Lerner hypothesis, the condition under which balance of payments adjustment works in the Nigerian economy. The analytical framework employed is an econometric methodology, which encompasses wide a range of tests for stationarity, cointegration and specification of an error correction model. Using data obtained from the Nigerian economy covering the period of 1970 to 2004, result of over-parameterized error correction model show significant causational relationships in the two models. Specifically, from the values of the coefficient of the current and past (lag) level of exchange rate in the two models, the paper knots balance of payments adjustment to regime of exchange rate stability in Nigeria. The paper, therefore, recommends exchange rate adjustment as potent instrument of achieving balance of payments stability in Nigeria.