Dynamic Connectedness between Economic Policy Uncertainty and Macroeconomic Performance in Nigeria: Evidence from a TVP-VAR Approach

Abstract

This study examines the time-varying interdependence and shock spillovers between Economic Policy Uncertainty (EPU) and key macroeconomic performance indicators in Nigeria. Specifically, it investigates the transmission of shocks among EPU, GDP growth, exchange rate, inflation, interest rate and unemployment using a Time-Varying Parameter Vector Autoregression (TVP-VAR) connectedness framework based on the generalised forecast error variance decomposition. Descriptive statistics, correlation analysis and pairwise Granger-causality tests are also employed to provide complementary evidence on the strength and direction of the relationships. The results reveal substantial and time-varying interconnectedness among the six variables. GDP growth emerges as the strongest net transmitter of shocks, while EPU is the second-largest net transmitter; interest rate is the strongest net receiver. EPU shocks account for 27.15% of the forecast-error variance of unemployment, 22.83% of GDP growth and 21.02% of interest rate, compared with 13.68% for inflation and 5.18% for the exchange rate. The Granger-causality results indicate predominantly unidirectional predictive relationships: GDP growth, inflation and unemployment significantly predict EPU; unemployment predicts the exchange rate; GDP growth predicts the interest rate; and inflation predicts unemployment. No significant predictive effect of EPU on the other macroeconomic variables is found at the 5% level. Overall, the evidence indicates that Nigeria's macroeconomic system is highly interconnected and that the transmission roles of individual variables change over time. The findings underscore the need for coordinated macroeconomic policy, greater policy credibility and an integrated early-warning framework that monitors EPU alongside key macroeconomic indicators.