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THE IMPACTS OF FISCAL AND MONETARY POLICY ON THE NIGERIAN ECONOMY

ABSTRACT

This study investigates the nature of interactions between fiscal and monetary policies in Nigeria, as well as how these interactions influence the relative effectiveness of both policies within the new-Keynesian framework over the sample period 1970-2011 and at specific monetary regimes (1970-1993 and 1994-2011). Using the VAR approach, the study finds that the two policies seem to be counteractive for most part of the study period, especially during the direct control period (1970-1993); but evidence is also found in favour of accommodativeness at some points, mainly during the indirect control period (1994-2011). Also, using the Killick’s (1981) criteria, the study finds that, when analysed within an interaction framework, fiscal policy seems to be relatively effective compared to monetary policy in Nigeria. Furthermore, evidence is found in support of a non-Ricardian regime and the fiscal theory of price level (FTPL) determination which implies that inflation in Nigeria may not be unconnected with the fiscal recklessness of the government, and not necessarily monetary impotence. Overall, the study concludes that there seems to be fiscal dominance in the Nigerian economy, and advocates for proper coordination of fiscal and money policy, which is subject to cordial relationship and mutual commitments of the fiscal and monetary authorities.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The use of economic policy as tools for economic stabilization by governments of different economies of the world cannot be overemphasized. Some of these policy measures may have economic-wide effect (e.g. the budget and inflation) while others may have specific effects such  as the consumption tax on consumer good (Killick, 1981 and Black et. al., 2000). Policymakers around the world employ various policies, singly or mix, to stabilize the boom-bust cyclical swings of economic activities.

In macroeconomic management, the two most commonly employed policies are the fiscal and monetary policies. The Monetary policy, managed by the Central Bank, is conducted through changes in the money supply and the interest rate. While the Fiscal policy, which is managed by the government of that economy, is conducted through changes in  government spending and  taxes (Liborio, 2011; Hussain, Wijeweera and Hoang, 2012). Since 1980s, there has been a  general consensus among economists in

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