Impact of Financial Development on Merchandise Trade in Nigeria: A Disaggregate Analysis

Abstract

This paper conducts an empirical investigation of the relationship between financial development and merchandise trade in Nigeria. Our study focused on the effects of financial development on the components of merchandise trade: exports and imports. While theory predicts that well-developed financial systems help firms in overcoming liquidity challenges, thus, increasing their output, which, in turn, leads to an increase in trade, the empirical evidence suggests otherwise as mixed findings pervade the literature. Using Autoregressive Distributed Lag (ARDL) Model, our findings show that financial development has positive and significant effect on export both in the long-run and in the short-run. While the effect of financial development on import is positive but insignificant in the short-run, in the long-run, its effect on import is negative and significant. Our findings thus support the need for well-developed financial systems beyond its positive impact on economic growth.

Keywords: Financial Development, Liquidity Constraints, International Trade, Comparative Advantage, ARDL, Nigeria

JEL Classification: F14, G20, O16, O55