Capital From Rest of The World and Potential Output: An Analysis of Nigeria Business Cycle
- Ehilegbu Emmanuel Chidozie
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University of Port Harcourt Rivers State Nigeria Department of finance and banking PhD student
Developing effective macroeconomic policy framework to manage the Nigeria economy is essential. Several categories of capital resources from rest of the world are used for economic expansion. But in the midst of random shocks and other factors actual outputs deviate from potential domestic capacity to produce. The present paper provides new evidence that Nigeria actual output is below its optimal capacity to produce. It broadly investigates whether specific structures of capital from rest of the world and recorded historical random shocks return downward business cycle to natural long run output trend. Analytical data are sourced from World Bank development indicators while Hodrick-Prescott filter separates potential output from short term fluctuations for the period between 1970 and 2021. Specific data are drawn from External Debt, Foreign Direct Investments, Official Development Assistance and Gross Domestic Product. We employed standard Augmented Dickey-Fuller unit root test for stationary series. Subsequently, baseline Ordinary Least Square and Engle-Granger Cointegrating regression methods estimated the association between capital inflows and potential output. Preliminary result points to the fact that actual output either equated to long run GDP or deviated below aggregate capacity to produce. Our empirical estimation based on commonly used proxies of foreign capital showed positive and significant relationship with potential output. Also, random shocks positively contribute to potential output. Foreign direct investment and official development assistance provide greater contribution in returning output gap to standard equilibrium. Conclusively negative output gap is evident where current production is less than optimal capacity. Finally, capital from rest of the world is essential in adjusting equilibrium position of business cycle and natural long run growth rate in the Nigeria economy.