External shocks and macroeconomic responses in Nigeria: A global VAR approach

Lukman Oyeyinka Oyelami,P.A Olomola,Mariam Camarero

doi:10.1080/23322039.2016.1239317

Lukman Oyeyinka Oyelami, P.A Olomola + Show 1 more

Open Access

https://doi.org/10.1080/23322039.2016.1239317

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Abstract

AbstractThis study investigates the macroeconomic responses of Nigerian economy to external shock between 1986 and 2014. Specifically, we examine the effect of oil price shocks and macroeconomic shocks from developed trading partners on Nigerian macroeconomic performances in order to establish pattern of reactions to these shocks in the country. We employ global vector autoregression (GVAR) comprising of the US, EU, China, Japan and Nigeria as the reference country. The adoption as of this method of estimation is necessitated by its capability to effectively model complex high-dimensional system and also offers adequate tools to deal with the curse of dimensionality that can arise from a study of this nature. Having critically examined the econometric properties of our GVAR model, the results from our estimation based on impulse response function show that oil price shocks have direct effect on real gross domestic product and exchange rate in Nigeria but variables like inflation and short-term interest ra...

Highlights

African countries in general are highly dependent on the volatile prices of primary commodities and aid flow Raddatz (2008)
Based on the results obtained, it can be concluded that Nigerian economy is vulnerable external shocks and such shocks is not limited to oil price shocks
Other form of shocks such as growth spillover and financial shocks from developed countries are relevant in shaping the macroeconomic performances in Nigeria

Summary

Introduction

African countries in general are highly dependent on the volatile prices of primary commodities and aid flow Raddatz (2008). Olomola and Adejumo (2006) conclude that oil price shocks (positive) do not have a direct effect on output and inflation except via real exchange rate and money supply Apart from this little controversy in the literature of oil price shock in Nigeria, it important to investigate how other external shocks affect Nigerian economy, especially the growth spillover from other advanced economies of the world. The global VAR (GVAR) approach, developed in Pesaran et al (2004) was employed to investigate the dynamic interaction of external shocks and macroeconomic performances in Nigeria The adoption of this methodology is based on the fact that it provides a relatively simple and effective way of modelling complex high-dimensional system and offers adequate tools to deal with the curse of dimensionality that can arise from a study of this nature. Apart from foreign reserve and foreign direct investment introduced as endogenous variables in Nigerian model, all other macroeconomic and financial variables have been widely employed in similar studies outside Zone Pesaran, Shin, and Smith (2000), Pesaran et al (2004), Pesaran, Schuermann, and Smith (2009), Han and Ng (2011) and Gurara and Ncube (2013)

Econometrics properties of the data

Findings

Conclusion and recommendations