# INTRODUCTION The conventional wisdom is that openness to international trade and financial developmenthas a positive impact on economic growth

The general form of ADF test is estimated by thefollowing regression Where: Y is a time series. Augmented Dickey-Fuller test relies on rejecting a null hypothesis of unitroot (the series are non-stationary) in favor of the alternative hypotheses of stationarity. n is the optimumnumber of lags in the dependent variable and e is the random error term. we test the presence or otherwise of cointegration between the series of the same order of integrationthrough forming a cointegration equation. Since financial development is being proxied by three variables we separate the three variables in determining the Granger causality with Growth rate and Openness to form these three models: DC = + GR + TO + ---------------------------------.1) PC = + GR + TO + ---------------------------------. and 0 is the constant term.1 Unit Root Test The first step involves testing the order of integration of the individual series under consideration. and the Phillip-Perron (PP) due to Phillips(1987) and Phillips and Perron (1988). 3. However. 3. Researchershave developed several procedures for the test of order of integration. The basic idea behind cointegration is that if. is the first difference operator.3) 0.3.(3. the second equation includes both drift and linear timetrend pp. and µ ¶ is the random error term.2 Co-integration test Secondly. The tests are conductedwith and without a deterministic trend (t) for each of the series. 1981).3 Estimation Technique 3. and others are as explained above. t is a linear time trend.(3. the difference between equation (1) and(2) is that the first equation includes just drift. 0 is a constant.2) M = + GR + TO + ------------------------------------. The most popular ones are AugmentedDickey-Fuller (ADF) test due to Dickey and Fuller (1979. in the long-run. two ormore series move closely together. 0 and 0 are constant terms.Where: FD is financial development proxied by Private Credit (PC) and Money Supply (M2) GR is Growth rate of GDP TO is Trade Openness.3. even though . µt¶ is the time trend.(3.

We employ the maximum-likelihood test procedure established by Johansen and Juselius (1990) and Johansen(1991). Johansen (1988..4 Granger-causality Test After the testing of the Cointegration relationship.Specifically. A lack of cointegration suggests that such variables have nolong-run relationship: in principal they can wander arbitrarily far away from each other (Dickey et. an Error Correction term (ECT) isrequired to be included (Granger. Tradeopenness and Economic Growth in Nigeria.3. If the variables are cointegrated. the testcalculated as follows: Where: T is the number of usable observations. 1989) and Johansen and Juselius (1990)suggested two statistic test. al. It tests the null hypothesis that the number ofdistinct cointegrating vector is less than or equal to q against a general unrestricted alternatives q = r. if the reverse is the case we will go ahead to test our causalityusing the following multivariate equation: MODEL 1 Where: DCt is Direct Credit as a proxy financial development PCt is Private Credit as a proxy for financial development . we test for causality among financial development. if Yt is a vector of n stochastic variables. the first one is the trace test ( trace). and the 1. 1991). as the differencebetween them is stationary (Hall and Henry.the series themselves are trended.s are the estimated eigenvalue from the matrix. This VAR can be rewritten as1 To determine the number of co-integration vectors. 3. however. 1989). the difference between them isconstant. then there exists a p-lag vector auto regression withGaussian errors of the following form: Johansen¶s methodology takes its starting point in the Vector Auto regression (VAR) of order P given by Where: Yt is an nx1 vector of variables that are integrated of order commonly denoted (1) and t is an nx1 vector ofinnovations. It is possible to regard these series as defining a long-run equilibrium relationship. 1988).

Linear Trend Lag Length: 1 (Automatic based on SIC. We use both the Augmented Dickey Fuller (ADF) tests to find theexistence of unit root in each of the time series. The results of both the ADF and PP tests are reported in Table 1 Null Hypothesis: D(GDP) has a unit root Exogenous: Constant.754821 -4. Unit root test result is reported first followed byJohansen cointegration test result and lastly. -4.Mt is broad Money Supply also used as a proxy for financial development TOt is Trade Openness GRt is Growth Rate of GDP 4.1 Unit Root Test The first step is to test whether the relevant variables in equation (2) are stationary and to determine their ordersof integration.0096 . MAXLAG=2) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level *MacKinnon (1996) one-sided p-values.728363 -3.759743 -3. Empirical Results This section presents results of empirical analyses of the paper.324976 Prob. 4.* 0. Granger-causality test result.

Linear Trend Lag Length: 1 (Automatic based on SIC.616209 -3.* 0. -4.297799 Prob.0065 .0030 Null Hypothesis: D(CURRACC) has a unit root Exogenous: Constant.297276 -4.710482 -3. MAXLAG=2) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level *MacKinnon (1996) one-sided p-values.Null Hypothesis: D(PVTCR) has a unit root Exogenous: Constant.* 0.673616 -3.277364 Prob.532598 -3.755680 -4. Linear Trend Lag Length: 0 (Automatic based on SIC. -5. MAXLAG=2) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level *MacKinnon (1996) one-sided p-values.

0023 . This can be seen by comparing theobserved values (in absolute terms) of both the ADF and PP test statistics with the critical values (also inabsolute terms) of the test statistics at the 1%.61718 0. the result reveals that all the variables were stationary at first difference. Following from the above result.e.05 Critical Value 42. share a common trend and long-run equilibrium as suggestedtheoretically. We started the cointegration analysis by employing the Johansen and Juselius multivariatecointegration test. As shown in table two. i.91525 Prob. the null hypothesis is accepted and it is sufficient to conclude thatthere is a presence of unit root in the variables at levels. Date: 12/31/10 Time: 10:38 Sample (adjusted): 1990 2008 Included observations: 19 after adjustments Trend assumption: Linear deterministic trend (restricted) Series: LCURRACC LGDP LPVTCR Lags interval (in first differences): 1 to 1 Unrestricted Cointegration Rank Test (Trace) Hypothesized No.2 Cointegration Result After confirming the stationarity of the variables at 1(1). all the variables weredifferenced once and both the ADF and PP test were conducted on them. TO and the different measures of financial development.The result in table 1 shows that all the variables were not stationary in levels. suggesting thatthere is no cointegrating relations between GDP. From the result both trace statistic andmaximum Eigenvalue statistic indicated no cointegration at the 5 percent level of significance. Table 3 and 4 shows the result of the cointegration test. 5% and 10% level of significance. of CE(s) None * Eigenvalue 0. Therefore. it means that financial development. we proceed to examine the issue of cointegrationamong the variables. Result from table 1 providesstrong evidence of non stationarity. 1(1). When a cointegration relationship is present. tradeopenness and economic growth finance. the null hypothesis of non-stationarity is rejected and it is safe to conclude that the variables are stationary. 4.** 0.This implies that the variables are integrated of order one. On the basis ofthis.844447 Trace Statistic 54.

05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized No.39645 LPVTCR -42.247426 0.26254 8.87211 12.46744 3. of CE(s) None * At most 1 At most 2 Eigenvalue 0.439957 0.034834 0.5118 0.05 Critical Value 25.38704 12.352136 Max-Eigen Statistic 35.844447 0.247426 25.352136 19.05 level * denotes rejection of the hypothesis at the 0.662712 Unrestricted Adjustment Coefficients (alpha): .0021 0.143938 -3.** 0.01511 8.098029 LGDP 23.82321 19.691937 -0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I): @TREND(89 ) 1.51798 0.325107 -10.51798 Prob.At most 1 At most 2 0.439957 0.2321 Trace test indicates 1 cointegratingeqn(s) at the 0.85257 -2.975417 1.05 level * denotes rejection of the hypothesis at the 0.2321 Max-eigenvalue test indicates 1 cointegratingeqn(s) at the 0.2655 0.545320 LCURRACC -2.273863 -3.35464 11.

02561) D(LPVTCR) -0.054043 0.28601 Normalized cointegrating coefficients (standard error in parentheses) @TREND(89 ) LCURRACC LGDP LPVTCR .042021 (0.327411 (0.181825 0.09840) LCURRACC 1.13731) Adjustment coefficients (standard error in parentheses) D(LCURRAC C) 0.77845 Normalized cointegrating coefficients (standard error in parentheses) @TREND(89 ) -0.17704) LPVTCR 18.018480 0.32052 (1.84572 (2.003618 -0.036623 0.143989 D(LGDP) D(LPVTCR) -0.000821 0.024347 0.744081 (0.083277 (0.17952) D(LGDP) 0.D(LCURRAC C) -0.000000 LGDP -10.001802 1 Cointegrating Equation(s): Log likelihood 83.00976) 2 Cointegrating Equation(s): Log likelihood 89.

10158) 4.080014 (0.06349 0.4325 0.9388 0.079379 (0.05139) D(LPVTCR) -0.01963) -2.47471) -0.000000 -1.027639 (0. 0.930221 (0.000000 1.075171 (1.421646 (0.43153 4.10019) 0.0377 .856730 (0.89040 0.19848) Adjustment coefficients (standard error in parentheses) D(LCURRAC C) -0.774465 (1.18059 Prob.000000 -1.1.395418 (0.000000 0.6867 0.01164) 0.38611 0.6579 0.70816) 0.28495) D(LGDP) 0.3 Granger Causality Test Pairwise Granger Causality Tests Date: 12/31/10 Time: 10:43 Sample: 1988 2008 Lags: 2 Null Hypothesis: LGDP does not Granger Cause LCURRACC LCURRACC does not Granger Cause LGDP LPVTCR does not Granger Cause LCURRACC LCURRACC does not Granger Cause LPVTCR LPVTCR does not Granger Cause LGDP 19 19 Obs F-Statistic 19 0.26597) 0.075157 (0.

94786 0.0000 3.19970 60. respectively.000000 Std.071569 0. -2. The results are reported in Table 5.0001 Dependent Variable: LGDP Method: Least Squares Date: 12/31/10 Time: 10:34 Sample: 1988 2008 Included observations: 21 Variable C LCURRACC LPVTCR R-squared Adjusted R-squared S.857036 0. 2 and 3.155516 Hannan-Quinn criter. 0.189284 Mean dependent var S.048094 t-Statistic 13.529446 0. we carried out the Granger-causality.304733 Schwarz criterion -2.882525 11.0099 0.Table 6 and Table 7.06261 2.D.139219 0.00846 Prob.LGDP does not Granger Cause LPVTCR 18. dependent var Akaike info criterion -2. 6 and 7 shows the results of model 1.0000 0.506221 Having found no cointegration among the variables of financial development (DC.048298 0.149925 0. Error 0.3590 0. PC and M2).871333 0.272349 Durbin-Watson stat 0.092199 27. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 1.E. trade openness(TO) and economic growth (GR).132224 0.727184 0. . Where table 5.