Predictive Dynamic Linear Models for External Reserves-Economic Growth Nexus A Case Study

摘要

Over the years, there has been a debate whether thereis a need to beef up the level of foreign reserves or trim them down, and thisdebate is becoming more interesting especially in developing countries. It is usualfor countries in the world to hold external reserves in order to have afavourable level of exchange rate especially with a view of stabilizing andestablishing a robust economy. Most previous studies had concentrated onmodeling External Reserves-Economic Growth nexus with classical time series andeconometric models with static parameters. In this paper, we propose a Bayesiantime-varying parameter dynamic linear model for econometric modeling ofexternal reserves-economic growth nexus using the Nigerian economy as a casestudy. We assess the predictive performance of external reserves on economicgrowth in comparison with some selected macroeconomic variables. Our empirical findingsreveal that external reserve has the least Mean Squared Prediction Error (MSPE)among the several one-regressor models considered over the years, while themodel involving the combination of external reserves and capital expenditurehas the least MSPE among the two regressor models considered in our econometricanalysis. The economic implications of these results were discussed and used tomake policy recommendations.