Testing the Empirical Validity of the Mundell-Fleming Model

Considering the constant outflow of capital and the constant trade deficit in the Nigerian economy, the Mundell-Fleming model provides policy prescriptions for such unfavourable situation. However, the empirical validity of this model is tested in this work to find out if the model can be applied to the Nigerian economy. The study was carried out using data obtained from the Central Bank of Nigeria (CBN) 1970 to 2012. The technique of Vector Autoregressive Model and the Granger causality test were used to test the empirical validity of this model in Nigeria. The result of the impulse response function using VAR shows that the prediction of the Mundell-Fleming theory holds and its policy prescriptions can be effective in the Nigerian economy. However, the results of the Granger causality test showed that net exports granger-causes FDI without a feedback, and no causality in other variables.