An Empirical Analysis of the Relationship between Key Macroeconomic Variables and Economic Growth in Nigeria (1980-2021)

Abstract

This study adopts the Vector Autoregressive (VAR) model to analyze the relationship between key macroeconomic variables and economic growth in Nigeria, Using time series data sourced from the World Bank Development Indicators (WDI), for the period 1980 to 2021. The key macroeconomic variables analyzed are inflation, exchange rate and money supply. The result gives an average high R2 of 0.7000 which connotes that the overall model is a good fit. The result of the VAR analysis at lag two indicates that the variables are dynamically interacted. Starting with the growth (GDP) equation, a 1% increase in the previous year values of exchange rate, GDP, inflation, and money supply lead to a 0.3% increase, 33% increase, 3% increase, and 26% increase in current GDP respectively. Here, GDP and money are positively related. The money supply shows that a 1% increase in the previous year values of exchange rate, GDP, inflation and money supply lead to a zero per cent decrease, 8% decrease, 7% decrease and 91% increase in current money supply. The result is consistent with monetary policy given that the relationship between money supply and inflation. The equation of inflation shows that a 1% increase in the previous year values of exchange rate, GDP, inflation and money supply lead to 9% decrease, 33% decrease, 68% increase and 15% increase in the current level of inflation. The consequences of a growing inflation and high exchange rate phenomenon are so damning that Nigeria cannot afford them. Such implications are glaring in the economy of Nigeria where many negative developments were traceable to the non-availability or insufficiency of foreign exchange for businesses especially small and medium enterprises (SME’s) with a frequent rise in general price level. Therefore, the need to aptly address this ugly development by the monetary and fiscal authority cannot be overemphasized. Keywords: Money supply; economic growth; VAR model, Inflation and exchange rate. DOI: 10.7176/JESD/14-8-06 Publication date: April 30 th 2023