The intertemporal approach to modeling the current account: Evidence from Nigeria

This dissertation has two objectives. The first is to modify the existing Present Value Model of the Current Account (PVMCA) to reflect the major features of the Nigerian economy and to determine if this resulting theoretical framework is valid for the analysis of the Nigerian current account for the period 1960--97. The second objective is to examine the excessiveness and sustainability of the Nigerian current account deficits during this period.;To achieve these objectives, the thesis presents a model of current account determination that is based upon the permanent-income hypothesis of private consumption behavior. We derive a present value relationship among the current account, expected changes in net output and a consumption-based real interest rate. This thesis then extends this framework to incorporate changes in the terms of trade and possible asymmetric access to the international financial markets. It also conducts an empirical estimation of the several variants of the PVMCA. The econometric results show that an intertemporal model of current account determination that includes changes in the interest rate, exchange rate and terms of trade outperforms one that excludes them.;This thesis represents the first attempt to use an intertemporal model of the current account and selected macroeconomic and structural indicators to assess the external position of the Nigerian economy. The empirical results support the hypothesis that current account deficits accompanied by macroeconomic instability and structural weaknesses can generate an external crisis.