Microeconomic Policy Responses to Internal and External Shocks in Nigeria-a Dynamic Stochastic General Equillibrum Approach

This study investigates the macroeconomic effects of some internal and external shocks on the Nigerian economy and the impact of various macroeconomic policies responses to these shocks. The types and channels of shocks that affect macroeconomic performance are identified. The evaluation of alternative policy setups and policy reactions from different sources are considered in order to draw lessons for the macroeconomic management of a small open economy, like Nigeria. The study combines the Bayesian estimation technique, impulse response functions and variance decomposition analysis of DSGE models. The impulse responses of the variables to one standard deviation and the variance decomposition show that exogenous shocks are more important in explaining the variations in the main macroeconomic variables. The model is subjected to shocks in domestic output, domestic inflation, domestic nominal interest rate, foreign output, foreign inflation, foreign nominal interest rate and real exchange rate. Results obtained from the DSGE estimation of the model show that changes in prices are influenced mainly by volatility in real output while exchange rate and inflation account for significant proportion of the variability in interest rate. At the macroeconomic level the very high volatility recorded in the real growth rates, price inflation, private investment per capita, government revenues per capita, terms of trade and real exchange rate closely reflect the pattern of external economic shocks. However, the impact of domestic shocks is moderate but persistent. The study found that external shocks can only explain a small fraction of the output variance of a typical small open economy. From a quantitative perspective the output effect of external shocks is typically small in absolute terms, but significant relative to the historic performance of Nigeria economy. Finally, it is discovered that, the developed economies, demand, supply and interest rate shocks have significant and persistent impacts on the domestic macro economic variables. These results emphasize the fact that macroeconomic policies in Nigeria should seriously take into account the impact of the developed economies shocks on the fluctuations of the domestic variables. To this end, the study considers that it is important to analyze and evaluate alternative policy setups and policy reactions from different perspectives in order to draw lessons for macroeconomic management.
A Thesis Submitted to the School of Postgraduate Studies, University of Lagos
Economic shocks , Dynamic stochastic model analysis , Macroeconomic policy responses , Nigerian economy , Research Subject Categories::SOCIAL SCIENCES::Business and economics::Economics
Adebisi, A.A (2015). Microeconomic Policy Responses to Internal and External Shocks in Nigeria-a Dynamic Stochastic General Equillibrum Approach. A Thesis Submitted to University of Lagos School of Postgraduate Studies Phd Thesis and Dissertation, 156pp.