Macroeconomic Shock Transmission in Nigeria Before and During COVID-19 Pandemic: Evidence from a VECM Framework
DOI:
https://doi.org/10.54536/ajase.v5i2.7924Keywords:
Break Point, COVID-19 Pandemic, Shock Transmission Channel, Time Series Econometrics, Vector Error Correction Model (VECM)Abstract
Macroeconomic instability remains one of the major challenges affecting economic performance in Nigeria, particularly through fluctuations in exchange rate, inflation, economic growth, interest rate, exports, and money supply. Outbreak of the COVID-19 pandemic further intensified these challenges by disrupting economic activities, international trade and policy transmission mechanisms. This study therefore examined the transmission and dynamics of macroeconomic shocks in Nigeria by comparing the pre-COVID-19 and during COVID-19 periods using the Vector Error Correction Model (VECM) framework.
The study employed monthly time-series data on exchange rate, inflation rate, gross domestic product, interest rate, export rate, and money supply. Stationarity of the variables was examined using Augmented Dickey-Fuller and KPSS tests, while Johansen cointegration, VECM estimation, Granger causality, impulse response functions and variance decomposition techniques were applied. The results showed that all variables were integrated of order one, I(1), in both periods. The pre-COVID-19 regime revealed five cointegrating equations, indicating stronger long-run relationships, whereas the COVID-19 period showed only three cointegrating equations, suggesting weakened macroeconomic integration. The error correction coefficient for exchange rate changed from (-0.997, p < .001) before COVID-19 to (-1.567, p < .001) in COVID-19 period, establishing exchange rate as the primary adjustment variable. Variance decomposition further showed that the exchange rate made the highest contribution (17.26%) to GDP variation and emerged as the dominant macroeconomic shock transmission channel influencing GDP dynamics during the pandemic. The study concluded that COVID-19 significantly altered macroeconomic shock transmission and weakened adjustment mechanisms in Nigeria, thereby necessitating stronger exchange rate management and macroeconomic stabilization policies.
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