CAUSALITY BETWEEN KEY MACROECONOMIC FACTORS AND NIGERIA’S ECONOMIC GROWTH

Abstract

Globally, macroeconomic factors or variables such as interest rates, inflation rates, exchange
rates, export of goods and services, consumer price index, etc. play fundamental roles on the
economic performance of any country, especially the developing countries. This work therefore
investigates the causal dynamics between the Nigeria’s economy growth proxy as Gross
Domestic Product (GDP) and some vital macroeconomic factors such as Exchange Rate (EXR),
Consumer Price Index (CPI) and Export of Goods and Services (EGS) using the unrestricted
Vector Autoregressive (VAR) modeling techniques. Pre-examinations of the time series
variables using the Augmented Dickey-Fuller (ADF) and cointegration tests confirmed that the
series are not only difference stationary series of order ones {I(1)s} but are also not cointegrated;
which means that the VAR (p) model is appropriate for analyzing the series. However, the
Akaike Information Criteria (AIC), Bayesian Information Criteria (BIC) and Hann-Quinn
Information Criteria (HQC) selected the optimal order p to be 5 (i.e. p = 5). This means VAR (5)
will be fitted to the datasets. Model stability diagnosis of the VAR (5) model revealed that: all
inverse roots of characteristic AR polynomial have modulus less than one and lie inside the
circle; majority of the spikes of the residual correlogram are laying inside two standard error
bounds, and there is no serial correlation in the residuals of the fitted model. In other words,
VAR (5) is stable. Findings from the study established that there is no causation or prediction
running from the EXR, EGS and CPI to GDP. Conversely, there are unilateral causalities
running from the GDP to EXR, EGS to EXR while bilateral causality exists between CPI and
EXR. Finally, there is no causation or prediction running from GDP to EGS, EXR to EGS, CPI
to EGS, GDP to CPI, and EGS to CPI.