An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria: PovertyA comparative assessment of the error correction term (coint eq1) at the bottom of table 4 for the first vector shows that poverty has a t- value of -3.25144 with the right negative sign. The other variables except the REER either have a wrong sign or are not significant. This suggests that the poverty equation constitutes a cointegrating relationship in the first vector. The REER is also significant with a t-value of -2.27725 and coefficient of -0.265390. The results thus suggest that about 20 percent of the disequilibrium in poverty is corrected each year, while about 27 percent of the disequilibrium in the REER is corrected yearly. The error correction term for absorption has the right sign and falls within the acceptance region of -1<error term<0 but it is not statistically significant, while that of human capital development measured by primary school enrolment is statistically flawed. The result thus shows how poverty responds to variations in the REER as well as absorption and human capital development.
The next step in the empirical results is on the variance decomposition which shows the percentage of variance explained by the shock from the variable itself and the shocks from the other variables in the model. The results of the variance decomposition are shown in tables 5 to 8.
A Proper assessment of the result of the variance decomposition reveals that majority of the variances in the variables have been as a result of their ‘own’ shocks. However, human capital development, REER and poverty had significant impact on the variances of the other variables through the share of their shocks to these variables. For example, the share of per capita income to variances in other variables which explain the impact of poverty has been highly significant during the study period. Apart from ‘own’ shock which was as high as 100 percent in the first period, the contribution of poverty to variances in REER was as high as 42 percent in the first period and increased to 48 percent in the 5th period before declining to about 42 percent in the last period. The share of poverty to the variances in human capital development is also significant. It was about 29 percent in the first period but declined to about 12percent in the last period. The contribution of poverty to absorption was however not significant hovering between 2 to 4 percent. Following the variance decomposition of REER, shocks in poverty explained almost equal variance to the REER as REER contribution to shocks in itself. The contribution of REER to shocks in poverty was also significant. It increased from about 4 percent in the second period to about 13 percent in the last period. Other than the significant contribution of human capital to shocks in itself, which is about 85 percent in the last period? read only

Table-5 Variance decomposition of LPCY

Period S.E. LPCY LGSP LPE LREER
1 0.160951 100.0000 0.000000 0.000000 0.000000
2 0.251153 94.62923 0.206525 1.518983 3.645263
3 0.325546 90.70838 0.123980 3.253821 5.913817
4 0.437775 81.97619 0.543469 8.821594 8.658745
5 0.553931 76.35704 0.374786 12.40398 10.86420
6 0.663635 72.38024 0.347826 15.41558 11.85635
7 0.752883 70.39491 0.321492 16.87222 12.41138
8 0.825491 69.40638 0.297627 17.72594 12.57005
9 0.883762 69.07216 0.279501 18.06218 12.58616
10 0.932225 69.04442 0.265495 18.14524 12.54484

Table 6: Variance Decomposition of LGSP

Period S.E. LPCY LGSP LPE LREER
1 0.705572 0.105902 99.89410 0.000000 0.000000
2 0.775518 2.076752 97.79874 0.073871 0.050636
3 0.887526 4.436219 92.90897 2.615676 0.039130
4 0.971733 3.716829 93.90674 2.306864 0.069569
5 1.053011 3.177762 94.57545 1.978680 0.268107
6 1.122780 2.911113 95.01500 1.741789 0.332100
7 1.186474 2.620359 95.42071 1.564901 0.394030
8 1.251674 2.384450 95.76605 1.406115 0.443384
9 1.311948 2.229655 96.03599 1.281929 0.452423
10 1.369343 2.113862 96.24977 1.184780 0.451588

Table 7: Variance Decomposition of LPE

Period S.E. LPCY LGSP LPE LREER
1 0.691208 28.64643 0.794008 70.55956 0.000000
2 0.820974 24.58177 0.701010 73.96894 0.748285
3 0.941116 19.64720 1.480585 78.26106 0.611157
4 1.072284 17.77463 1.901708 79.77677 0.546885
5 1.163807 16.37995 1.719913 81.41084 0.489293
6 1.234988 15.04856 1.780358 82.71180 0.459280
7 1.291745 14.03074 1.851201 83.62676 0.491304
8 1.342889 13.19754 1.858960 84.39030 0.553206
9 1.391837 12.49071 1.898150 85.01032 0.600819
10 1.440387 11.89225 1.933328 85.55673 0.617694

Table 8: Variance Decomposition of LREER

Period S.E. LPCY LGSP LPE LREER
1 0.312443 42.21212 6.077503 3.470507 48.23987
2 0.531918 46.46659 13.06131 6.052919 34.41918
3 0.659095 49.64020 11.74371 7.106961 31.50913
4 0.716959 48.44019 15.11831 6.007952 30.43354
5 0.750803 47.61107 17.64410 5.673202 29.07163
6 0.782706 45.59788 20.34874 6.588101 27.46528
7 0.812837 43.69992 22.65136 7.657076 25.99165
8 0.842597 42.43160 24.33542 8.362657 24.87033
9 0.873596 41.73168 25.64508 8.506780 24.11646
10 0.905987 41.56488 26.52207 8.243623 23.66942