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

Abstract

Abstract This study simulated the counterfactual shock effects of inflation and exchange rates on economic prosperity (measured by GDP per capita) when considering deficit financing, foreign investment, and financial development for Nigeria from 1970 to 2020. Empirical inferences were derived by applying the novel dynamic ARDL and the Kernel regularised least squares models. Applying both techniques enabled the response of economic prosperity to future counterfactual shocks to the inflation and exchange rate variables. It was observed that inflationary shocks might have long-term beneficial effects on economic prosperity; however, shocks to the exchange rate will erode these benefits. Findings also showed that inflation rate and deficit financing adversely impacted short and long-term economic wealth. Contemporaneously, the exchange rate and financial development only benefited economic prosperity in the long term, while foreign investment was ineffectual. The study also proposed several policy measures.