Abstract

Researcher every so often model economic relationship using linear models. Even when non-linear models are used, they hardly consider the possibility of regimes, the transmission from one regime to another and also the duration of stay in a particular regime. These are not captured by linear models. To address this, we applied the Markov-Switching Mean Vector Autoregressive Model to model and estimate the interdependence between macroeconomic variables (International Trade and Macroeconomic Stability) within the context of the Nigerian economy. Specifically, the study analyzed the trends of total export, total import, exchange rate, and inflation rate in Nigeria within the study period, Estimated MSM-VAR models on the study variables and selected the best model using information criteria. The study empirically investigated the interdependence existing among the study variables, determined the probabilities of transition from one regime to another and the duration of stay in a regime. The study ascertained the relative significance of each random innovation in affecting the study variables. Monthly time series data 246 months spanning through January 2000 to June 2020 was collected form the Central Bank of Nigeria Statistical Bulletin. The study used the Markov-Switching Mean Vector Autoression in the Analysis. The results showed that all variables were stationary at first difference. The study chose 2 regimes and the model selection criteria selected [MS(2)-MVAR(2)]. The variables were largely self-explanatory and very strongly exogenous.

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