External shocks and output composition: evidence from Nigeria

Purpose - The study investigates the impact of external shocks on output composition (consumption and investment) in Nigeria for the period 1981:Q1– 2018:Q4. Trade-weighted variables from the country's five major trading partners are constructed to capture the impact. Design/methodology/approach - The study employs a block exogeneity open economy structural vector autoregressive (SVAR) analysis in studying the stated relationship. Findings - The study reveals that external shocks significantly affect consumption and investment in Nigeria. Results from the structural impulse response function suggest that foreign output, real effective exchange rate and foreign interest rate have significant negative effects on consumption and investment. Specifically, results from error variance decomposition show that foreign inflation and real effective exchange rate shocks are major drivers of fluctuations in consumption and investment in Nigeria. Interestingly, the study finds that oil price shock accounts for minor variations in consumption and investment in Nigeria. Research limitations/implications - The findings suggest that consumption and investment in Nigeria are substantially and largely driven by external shocks. Practical implications - There is need for the monetary authority and the Nigerian government to design appropriate policies to stabilise the naira and salvage the country's exchange rate from unexpected large swings so as to reduce the vulnerability of the economy to external shocks. Originality/value - Previous studies on external shocks have concentrated on the impact of external shocks on aggregate variables such as output and inflation, while few studies on external shocks in Nigeria capture external shocks through single-country data. This study differs from previous similar studies in Nigeria in two ways. First, the study examines the impact of external shocks on output composition such as consumption and investment. Second, the study captures the impact of external shocks on the two components of gross domestic product (GDP) by constructing trade-weighted variables from Nigeria's five major trading partners.