Abstract

The understanding of the determinants of capital flows and the major challenges its sudden surge and flight might pose is central to assessing its macroeconomic impact in an economy. Most developing and transition countries are attracting large inflows of foreign capital that could spur economic growth or have destabilizing effect on their economies if not well managed and streamlined. This however, has aroused concern over their potential effects on macroeconomic stability, competitiveness of the export sector, and external viability. The study examines the relationship existing among foreign private capital components (Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), economic growth (GDP) and some macroeconomic indicators; interest rate (INTR) and inflation rate (INF) as well as policy implications therefrom, using time series data from 1986-2008. A nonrestrictive Vector Autoregressive (VAR) model was developed, while restriction is imposed to identify the orthogonal (structural) components of the error terms - Structural Vector Autoregressive (SVAR). Analysis indicates that the response of the GDP to shocks from the NDI is not contemporaneous and this is applicable to the other variables. It is somewhat sluggish but returns faster to equilibrium compared to the response from the NNPI. Restricting the recursive Cholesky structural decomposition of the IRF, both in the short-run and long-run, the result indicates that the NNPI impacts on the GDP at the short-run, while the NDI does not. Also, the INTR was shown to impact on the NNPI in the short-run. Furthermore, in the long-run, the GDP responds more to the impact of the NNPI compared to the NDI, while the NDI responds to INTR, the NNPI does the same to INF. Policy frameworks on Foreign Private Investment should be encouraged for the  promotion of economic development in Nigeria. Consequently, it is recommended that government should not discourage the flow of those foreign private capitals but be more vigilant about the nature and sources of the flows. This is very important in order to forestall their potential adverse impacts on key macroeconomic variables as well as economic growth in a situation of their sudden surge or flight.

 

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