Adjustment policies and current account behaviour: Empirical evidence from Nigeria

Abstract

One important indicator of the health of a country is the current account balance. Movements in this important macroeconomic variable convey information about the actions and expectations of the domestic and foreign market participants. This paper attempts to investigate the macroeconomic policy, non policy and financial sector variables that influence current account movements. To do this, the paper uses three methodologies: the Granger Causality test, co-integration test and the variance decomposition and impulse response function. The variance decomposition and impulse response function follows the Cholesky ordering. The results showed that causality is bidirectional between current account balance and budget deficit, this support the ‘twin deficit hypothesis’. The Granger Causality test also revealed the existence of a unidirectional causality of current account balance with exchange rate. The
causality runs from exchange rate to current account balance. The paper also found a unidirectional causality that runs from current account to trade openness. The study found that exchange rate, monetary policy credibility and budget deficit are the important macroeconomic variables that influence current account movement. The non policy variables that influence current account behaviour are terms of trade and trade openness. The proxy for stage of development, the per capita income is also a significant factor in current account movement. The study found no
causal link between measures of financial indicator variables and current account balance. The paper agues that to address the adverse changes in current account movement, policy should tackled the problem from the demand and supply sides.