International Financial Integration and The Nigerian Economic Performance: a Var Modeling Approach

Since it is believed that having access to a broader base of capital is a key requirement for economic growth, then financial integration is necessary because it expedites flows of capital from developed economies with rich capital to developing economies like Nigeria with limited capital. The major objective of this paper is to empirically investigate the relationship between international financial integration and the Nigerian economic performance, using annual time series data from 1970 to 2012. In order to do this, the study employs KPSS unit root test, Johansen cointegration test, VAR modeling, impulse response function, variance decomposition and granger causality. Empirical results show that there is a short-run relationship between international financial integration and economic growth. All the variables including, the ratio of net capital inflows to GDP and the ratio of FDI to GDP appear with the expected positive signs (except trade openness) and are statistically significant in the Nigerian economy. The findings have a strong implication on financial and international policy in Nigeria. The major implication is that further integration into the global economy would require sustained policy reforms, improved governance, and public-private investments in social, human, and physical infrastructure. The study suggests that rigorous efforts should be made by policy makers to improve infrastructural investment for the attraction of foreign capital.