Macroeconomic Factors and the Prospects of Economic Prosperity in a Developing Economy: Evidence from Dynamic ARDL Simulations and KRLS Techniques

Abstract

Policymakers have continued to be fascinated with the combinations of macroeconomic indicators that can drive long-term wealth in different countries. Consequently, this study investigated the effects of inflation and exchange rates, deficit financing, foreign investment, and financial development on economic prosperity measured by GDP per capita for Nigeria from 1970 to 2020. Empirical inferences were derived by applying the autoregressive distributed lag (ARDL), dynamic ARDL (DYNARDL), and the Kernel-based regularised least squares (KRLS) models. It was observed that inflation rate and deficit financing adversely impacted economic wealth in the short and long term. At the same time, the exchange rate and financial development only benefited economic prosperity in the long term. In contrast, foreign investment was reported to be prosperity-decelerating in the long term. Applying the DYNARDL and KRLS techniques enabled the response of economic prosperity to future counterfactual shocks to the inflation and exchange rate variables. While inflationary shocks may have long-term beneficial effects on economic prosperity, shocks to the exchange rate will slightly erode these benefits. The study proposed several policy measures.