Two-Stage Least Squares and Three-Stage Least Squares in Modelling Nigerian Economic Growth

Abstract

Every Country strives to attain economic stability. In a bid to achieve this, several economic indices are explored to make this a reality. This study focused on analysis of two stage and three stage least squares (2SLS and 3SLS) in modeling Nigerian economic growth. Considering the limitations of ordinary least squares (OLS) in dealing with simultaneous equations, we explored the use of two stage and three stage least squares which are more robust methods for this purpose. A secondary data was obtained from Central Bank of Nigeria bullion and the National Bureau of Statistics bulletin to investigate the relationship among economic growth, capital inflow and external debt servicing. Models for GDP, external debt servicing and capital inflow were obtained using R and Microsoft excel statistical packages. The study shows with coefficients of 3.9159 and -6.1878, that foreign debt- servicing has negative impact on GDP in the 2SLS and 3SLS models respectively: which is not significant in the 2SLS but significant in the 3SLS model. Also, GDP has negative, though significant effect on capital inflow with coefficient of -0.010495 and -0.0139109 in the 2SLS and 3SLS models respectively: a pointer to the effects of insecurity in Nigerian economic growth. The study recommends that Government should deplete existing external debt stock, increase utilization of capital stock and labour force, reduce borrowing rate, resort to alternative ways of enhancing both current and recurrent expenditures and deal with insecurity.