Financial Conditions Index and Economic Performance in Nigeria

Abstract

The main aim of this study is to construct a financial conditions index for Nigeria and analyze its predictive power for future growth rate and inflationary trend. The study is based on yearly time series data from 1985 to 2018. The variables included in the construction of the index are riskless interest rate, stock market index, exchange rate, credit to private sector and interest rate spread. The weights attached to these variables are derived from ARDL coefficients, while the predictive power of the constructed index is examined within the VAR framework. The results from the ARDL model shows that credit to private sector and stock market index are the most significant factors for nominal GDP, hence having a substantial weight in the resultant financial conditions index. However, the results from VAR impulse response function and forecast error variance decomposition suggest that the constructed financial conditions index contain very little predictive information about future growth rate and inflationary trend.

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“…They find that financial variables account for 32% of GDP growth. Ejem and Ogbonna (2020) examined the predictive power of FCI for future output growth and inflationary trends in Nigeria. They employed an Autoregressive Distributed Lag (ARDL) model to determine the weight attached to each variable.…”