Macroeconomic Policies And Business Cycles In Nigeria: 1970-2004

Abstract

 This thesis examines macroeconomic policy and business cycles in Nigeria over the period 1970 to 2004. The study is set to fill gaps in three important areas: in-depth study of business cycles in Nigeria; application of dynamic stochastic general equilibrium (DSGE) model using Bayesian technique of solution, this complements the existing system-of-equations and the computable general equilibrium (CGE) models; and the investigation of the role of productivity, money supply, and external trade play in business cycle. Thus, three objectives are associated with this work namely establish and characterize the existence of business cycle in Nigeria, analyze the sources of business cycle fluctuations, and measure the impact of shocks. The literature review carried out in this study is divided into three parts: the theoretical; methodological; and the empirical literature using experiences of industrial economies, the Latin American countries, the Asian economies and Africa.Two approaches are used: atheoretical and the DSGE model which is based on the New Keynesian analysis. The first establishes the stylized facts in relation to the existence of business cycles in Nigeria establishing varying periodicity and volatility. The second method adopts the works of Nason and Cogley (1994) and Scorfheide (2000), but goes beyond these works by incorporating an optimizing export sector. The DSGE model developed in this study to capture business cycle facts is perturbed by three exogenous shocks namely technology, monetary and export supply in line with the New-Keynesian analysis. The Bayesian method of estimation is applied on the hybrid DSGE-VAR model and the results are presented and discussed and its empirical performance evaluated. The impulse response functions and the variance decomposition are also discussed. The solution of the model is facilitated by the use if DYNARE v3 (Matlab version): a software package designed to solve DSGE models. From the atheoretical statistical method it is found that business cycle fluctuations exist in Nigeria and the observed stylized facts are comparable to those recorded elsewhere. The results suggest the existence of about two complete cycles from one trough to another, which is 1970-1989 (20 years) and 1990-2004 (15 years). These two cycles do not exhibit the same resemblance nor do they happen at constant or predictable internals. From the DSGE-VAR approach, the results show that productivity shock, money supply growth shock and export supply growth shock contributed in the statistical sense in explaining that the Nigerian business cycle is driven by both real and nominal shocks. Finally, a major finding of the study is the fact that the export sector which is supposed to be the engine of growth of the economy is exhibiting weak linkages with the rest of the economy. This suggests a major challenge of policy. In spite of the initial suspicion that business cycles do not exist in the Nigerian economy, this study has shown that they occur and quite at irregular intervals as predicted in the literature. The study also shows the degree of pro-cyclicality or counter-cyclicality between the gross domestic product and a number of its main components. The application of a DSGE model helps in affirming the fact that the Nigerian economy is buffeted by productivity, money supply and terms of trade shocks. Above all, the study shows that this family of models can be applied for policy analysis in Nigeria. In particular they could be used for monetary policy analysis and prescriptions as well as designing value addition export policies. It could also be used to understand some phenomena that may be influencing the course of the economy such as the Dutch-Disease syndrome. This study recommends that documenting business cycles, their dating and turning points, as well as analysis of the periods of booms and bursts should become major research efforts in the immediate future in the economy. It is suggested that the study’s approach could become a candidate model for understanding the Nigerian economy. Based on the limitations of the study, a certain number of areas for future research are highlighted. This study has contributed to knowledge in the following ways: First, there have been few studies to unravel the existence and characteristics of business cycle fluctuations in Nigeria. This study has shown that there is business cycle in Nigeria. Second, this study has contributed to quantitative macroeconomic assessment of the Nigerian economy based on the characterization and analyses of business cycles in a Dynamic Stochastic General Equilibrium (DSGE) framework. Third, econometric models provide tools for forecasting, understanding an economy and policy analysis. In this respect, this study has made attempt at providing an alternative and useful contribution to existing short-run macro-economic models particularly in the area of policy analysis. Finally, this study adopts the Bayesian method in the estimation of the DSGE model constructed for the Nigerian economy.