Dynamic causal chain of money, output, interest rate, exchange rate and prices: Nigeria as a case study

The primary aim of this study is to investigate the causal chain among output, money, prices, exchange rate and inflation in the context of Nigerian economy following the global economic crisis that hit many countries. The data used are from 1970 to 2012. The methodology employed uses several econometric techniques such as unit root tests, cointegration, vector error-correction model(VECM), variance decompositions and persistent profile in order to capture both the within-sample and out- of- sample causality. The result obtained is quite in line with our expectation given the nature of the Nigerian economy that relies heavily on the crude oil revenue and also imports from abroad. The result of cointegration analysis reveals that there exist long run relationships among the variables under study. From the VECM analysis, it suggests that output, interest rate and prices are the leading variables while exchange rate and money appear to have borne the brunt of the short run adjustments. This finding is in line with the real business cycle theory. In order to capture the impact of economic crisis on the selected variables, a dummy variable was created in the VECM analysis. It indicates an absence of the impact of the global economic crisis on the Nigerian economy as evidenced by the insignificance of the coefficient of the dummy variable. The findings of these results have economic policy implications in that output contains information about the sources of shock that affects the economy and hence output would be useful in predicting the future growth of the economy.