Abstract
Two compelling structural break models that deal with a known break (Bai 1997, 2010) and unknown common break (Pesaran, 2006) exist in the literature. However, the methodological framework underpinning structural breaks have enjoyed robust attention and filed with highly technical papers. This study considered the Pesaran CD test for cross-section dependence test, Least Squares Dummy Variable (LSDV) to determine heterogeneity in WAMZ, and Panel-ARDL (PMG) with a dummy variable-calibrated known break date to measure the statistical significance of DUM_FDI, DUM_ODA, DUM_IBRD, and Panel ARDL (PMG) without structural dummy-variable breaks. The motivating question becomes how Kristalina Georgieva-led IMF prediction consequently cascades into an intractable long-run effect on the WAMZ system. Due to the demand shocks from COVID-19 pandemic and supply shocks-supply glut from a price war between Saudi Arabia-Russia which has put the global economy into recession. The stability of the global economy is threatened, thus, since FDI, ODA is an integral part of global reinvested earnings (UNCTAD, 2020), hence this study is apt to unravel the impact of structural breaks in WAMZ arising from prior shocks between 1970-2017 from data sourced from World Development Indicators. This study measured how dummy variable (0, 1) structural breaks in foreign capital inflows (proxy by FDI, ODA, and IBRD) have long-term impacts in stimulating instability in WAMZ. We represented the dummy variable values 0 and 1; where 1 is structural breakpoints dates and afterward and 0 is used to denote before the structural breakpoints date. From the study, we observed that there exists cross-dependence in WAMZ at 1% LOS, heterogeneity also exists in WAMZ. Also, the impacts of structural breakpoints on selected macroeconomic indicators are mixed. The study found that the statistical significance of structural breakpoint at 5% LOS traces the susceptibility WAMZ to the rampaging health-related demand shocks and supply shocks in the long-run. Hence, a recession is likely in WAMZ. The study recommends that the regional government should undertake reforms to consciously diversify their economies and create market fundamental buffers, stimulate productivity and competitive supply frontier with a view to jump-start WAMZ economies from the impact of shocks and disturbances. In addition, provide stabilization funds to mitigate the adverse impact of shock-structural breaks on WAMZ economies.
Highlights
Global capital inflow depends on global reinvested earnings
Global share performance was affected declining by more than 7% in the U.S and 8% in the London indexes. These shocks could be explained by two major unrelated factors viz; health-related demand shock e.g. COVID-19 and supply shock caused by the inability of countries to scale back oil production e.g. Russia-Saudi Arabia price war effect
Based on the outcomes of the statistical significance of structural breaks calibrated dummy variables, we conclude that the International Monetary Fund (IMF) global prediction of recession is apparent in the long-run
Summary
Global capital inflow depends on global reinvested earnings. The global imperativeness of global capital inflows cannot be overemphasized the empirical significance of this study to examine how shocks in global capital inflow into WAMZ could capture Kristalina Georgieva-led IMF prediction on the long-run stability on the WAMZ system?. The 2020Q1 recession caused by the combined forces of health-crisis and the global oil price slump is worse than the economic meltdown of 2019 (IMF, 2020). The plummet in global oil prices caused uncertainty in the global stocks and share indexes across the world. Global share performance was affected declining by more than 7% in the U.S and 8% in the London indexes These shocks could be explained by two major unrelated factors viz; health-related demand shock e.g. COVID-19 and supply shock caused by the inability of countries to scale back (cut back) oil production e.g. Russia-Saudi Arabia price war effect. COVID-19 health-related issues and the supply shock introduced unprecedented global problems especially to the developing economies that depend on foreign assistance from abroad. The price gyrations of global oil prices send undesirable disturbances to the global economy (UNCTAD, 2020)
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