Do Productivity Shocks in the United States Matter to Components of Nigeria’s External Sector?

Abstract

The paper examines the effects of United States productivity shock on components of Nigeria’s external sector. Using a structural Macroeconomic Model (SMM), the paper modelled Nigeria’s external sector by using ten behavioural equations and four identities. The SMM was simulated, using a 3% increase and 3% decrease in US productivity to elicit responses of Nigeria’s external sector components to this shock. Using quarterly data from 1981 to 2015, the paper found that both positive and negative US productivity shocks elicited symmetrical responses from Nigeria’s external sector components. Also, both positive and negative shocks had little effects on Nigeria’s current account balance, imports, exports, foreign direct investments and reserves. However, positive shocks increased remittances inflow, a depreciation in nominal exchange rates, a reduction in foreign portfolio investment position, and a reduction in foreign debt flows. The responses for a negative US productivity shock were just the direct opposite of a positive shock. Our finding shows that, the components of Nigeria’s external sector will respond in like manner to both positive and negative shocks to United States productivity.