Macroeconomic Variables, Volatility and Economic Growth in Nigeria (1970-2005)

Abstract

Low output growth in Nigeria have been attributed to a number of factors such as

poor technology, demographic factors, social conditions, poor macroeconomic policies,

insufftcient infiastructural facilities and high dependence on primary products. What

however, attracts lesser attention is the interface between output growth and

macroeconomic fluctuations. It is not only that output growth is low but it fluctuates

beyond the expectations of different macroeconomic analysts. There have been varying

results among different existing empirical studies on the determinants of output growth

in Nigeria. Most of these studies used cross-country regression to estimate the

determinants of output growth. Cross country regressions suffer from measurement and

specification bias because of the heterogeneous nature of macroeconomic data among

less developed countries.

The current study adds to the existing literature by capturing the volatility

clustering of economic growth and its determinants using country specific regression. It

also addresses the problem of the relationship between current shock on economic

growth and conditional volatility of other periods ahead. This is useful for forecasting

volatility of economic growth and other macroeconomic variables. It fbrther addresses

the problem of determining the factors that are responsible for economic growth and how

structural shocks are transmitted among macroeconomic variables in Nigeria. The study

adopted two approaches: The Exponential Generalized Autoregressive Conditional

Heteroscedasticity (EGARCH) and Vector Error Correction (VEC) models. EGARCH

model was used to trace the determinants of economic fluctuations and the volatility

clustering of economic growth. The VEC model traced the transmission of structural

shocks among the variables.

The results show that fluctuations in economic growth is positively determined

by the level of inflation rate, real interest rate, unemployment rate, but negatively

influenced by investment ratio, per capita income, real exchange rate and the degree of

trade openness It hrther shows that there is transmission of structural shocks between

econon~ic growth and its determinants. However, the transmission mechanism of these

shocks is complex and difficult to determine. The result of the conditional variance

shows that there is high degree of volatility clustering between economic growth and its

determinants. The News Impact Curve (NIC) indicates that the current shock is

influenced by the previous shocks and its effect on other period ahead decays exponentially.