External Shocks and the Macroeconomic Response of Small Open Economy: A Structural-VAR Approach for Pakistan

Nizamani, Abdul Rahman; Gilal, Muhammad Akram; Khushik, Ali Gul; Sh, Syed Munawar; Abid, Abidullah

doi:10.3923/ajsr.2017.336.344

Cited by 4 publications

(20 citation statements)

References 14 publications

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“…Hence, an increase in oil price has negative medium to long-term effects on household consumption in Nigeria. This finding aligns with the conclusions reached by Edelstein and Kilian (2009) and Nizamani et al (2017), all of which state that an increase in world oil price negatively affects domestic output over long periods. This outcome might not be unconnected with the fact that the Nigerian economy relies on the importation of petroleum products, thereby increasing the country's vulnerability to oil price shocks.…”

Section: Resultssupporting

confidence: 91%

“…The result further shows that investment in Nigeria is highly sensitive to the foreign interest rate. Nizamani et al (2017) and Adefabi and Rasaki (2018) similarly find that a positive shock to world interest rate adversely affects output growth and investment in Pakistan and Nigeria, respectively. An increase in the foreign interest rate is thus expected to raise the cost of borrowing which would consequently reduce the amount of investment in the country.…”

Section: Resultsmentioning

confidence: 97%

“…A major implication of this assumption is that consumption and investment cannot influence the behavior of external variables, whether contemporaneously or with lags. The assumption of block exogeneity is therefore imposed on the external block variables (see Allegret et al , 2012; Mohamad and Said, 2016; Nizamani et al , 2017). Buckle et al (2007) state that such an assumption permits the inclusion of more external variables to integrate the diversity of shocks hitting the domestic economy.…”

Section: Methodsmentioning

confidence: 99%

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External shocks and output composition: evidence from Nigeria

Yinusa

2020

JEAS

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PurposeThe 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/approachThe study employs a block exogeneity open economy structural vector autoregressive (SVAR) analysis in studying the stated relationship.FindingsThe 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/implicationsThe findings suggest that consumption and investment in Nigeria are substantially and largely driven by external shocks.Practical implicationsThere 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/valuePrevious 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.

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Section: Resultssupporting

confidence: 91%

Section: Resultsmentioning

confidence: 97%

Section: Methodsmentioning

confidence: 99%

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External shocks and output composition: evidence from Nigeria

Yinusa

2020

JEAS

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“…The results indicate that developments in the euro zone explains about 50% of country's output and interest rate business cycle variance and about 25% of the variance of inflation. Nizamani et al (2017) examine the impact of external shocks on macroeconomic variables of Pakistan, using SVAR. The results show that the impact of adverse external shocks is significantly negative on Pakistan economy.…”

Section: Theoretical and Empirical Review Of Literaturementioning

confidence: 99%

External Shocks, Institutional Quality, and Macroeconomic Performance in Nigeria

Abere

Akinbobola

2020

Sage Open

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The study examines the relative contributions of external shocks and institutional quality to macroeconomic performance in Nigeria, using Structural Vector Autoregressive (SVAR) approach. The study establishes the dominance of the relative contributions of external shocks measures over institutional quality to macroeconomic performance in the country. Even though the dominance of terms of trade and foreign aid is highlighted, the role of institutional quality is equally important as it also has significant positive effect on performance. The study concludes that both external shocks and institutional quality play significant roles, and hence, posits the existence of favorable institutional environments as a panacea to successfully absorbing the influence of external shocks which are exogenous to the economy.

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“…Many studies have showed that sudden changes in international oil prices have adverse impact on the domestic economy of Pakistan. For instance, Nizamani et al (2017) have found that the macroeconomic performance of Pakistan is significantly affected by the oil price shocks. Their study followed an open economy SVAR model and the generated structural impulse response functions to show the underline effects.…”

Section: Literature Reviewmentioning

confidence: 99%

Adverse Supply Shocks and the Financial Response: An Empirical Study of Pakistan

Nizamani

Shaikh

2020

SIJMB

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The present paper has examined the role of monetary policy in mitigating the adverse supply shocks (i.e. rise in oil prices). A typical monetary policy is regarded as the stabilizing policy and it is responsible to safeguard an economy in the emergence of any negative shock from the external world. Pakistan's economy has been vulnerable to oil price fluctuations and it has often faced the long run negative impact, for instance the negative effects of 2008 commodity crises which were mainly because of the abrupt rise in oil prices. The monetary policy of Pakistan usually follows the tight policy stance as a response to such adverse supply shocks but the question always remain, how effective is it in mitigating those negative effects? In this regard, the present study has explored the effectiveness of monetary policy stance in Pakistan. In order to achieve the underline objective, this study has used the Shutdown Methodology in Structural Vector Autoregressive (SVAR) models on the quarterly data from 1992 to 2016. The results from the underline model have revealed that the monetary policy of Pakistan has a limited effectiveness on its main target variables of economic output and general price level.

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External Shocks and the Macroeconomic Response of Small Open Economy: A Structural-VAR Approach for Pakistan

Cited by 4 publications

References 14 publications

External shocks and output composition: evidence from Nigeria

External shocks and output composition: evidence from Nigeria

External Shocks, Institutional Quality, and Macroeconomic Performance in Nigeria

Adverse Supply Shocks and the Financial Response: An Empirical Study of Pakistan

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