Macro Economics

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    EXCHANGE RATE AND BALANCE OF PAYMENTS ADJUSTMENT IN SIERRA LEONE, 1970-2005
    (University of Ibadan, 2008-08-22) KORSU, ROBERT DAUDA,
    In spite of series of exchange rate adjustments in the 1980s and the adoption of the managed floating exchange rate regime in 1990, Sierra Leone still experiences poor external sector performance. The nominal exchange rate has been depreciating since the 1980s without reflection on the real exchange rate and the balance of payments. Both the theoretical and empirical literature on the effects of the nominal exchange rate on the real exchange rate and, hence, the balance of payments, are inconclusive. Previous studies on Sierra Leone focused on the elasticity approach, ignoring the wide macroeconomic implications of changes in the exchange rate. This study therefore examined the role of the exchange rate in balance of payments adjustment in Sierra Leone. Based on the absorption approach to the balance of payments, a small open-economy macroeconomic model that incorporated the linkages among fiscal, monetary and exchange rate policies, and the balance of payments was constructed using annual data from 1970 to 2005. The empirical analysis was based on estimating the macroeconomic model using the three stage least squares, and counterfactual policy simulations. Using Ordinary Least Squares with moving average errors, an equilibrium real exchange rate model which was derived from the basic tradable and non-tradable goods framework was also estimated. Although increase in the nominal exchange rate was inflationary, it increased the real exchange rate, non-mineral export, aggregate export, output, absorption and import. Moreover, it decreased the trade balance and increased the overall balance of payments. The correlation coefficients between actual and simulated series ranged from 0.5 to 0.94, while the covariance proportions of the Theil’s inequality coefficients ranged from 0.47 to 0.98. An 85 % increase in the nominal exchange rate increased the price level by 3.9 %, real exchange rate by 6.9 %, non mineral export by 117.1% and the balance of payments by 22.6% while it decreased the trade balance by 48.4%. Loose fiscal and monetary policies and trade restrictions reduced the potency of nominal exchange rate in attaining real exchange rate depreciation and improvement in the balance of payments of Sierra Leone. The estimated equilibrium real exchange rate model showed that an increase in investment appreciated the equilibrium real exchange rate, implying that investment took place more in the non-tradable goods sector than the tradable goods sector of Sierra Leone. Also, deterioration in-terms-of trade and trade restrictions appreciated the equilibrium real exchange rate. Nominal exchange rate depreciation leads to depreciation of the real exchange rate, and expansionary fiscal and monetary policies appreciate the real exchange rate. Although nominal exchange rate depreciation increases export and hence income, it raises import and therefore deteriorates the trade balance. It is, therefore, recommended that fiscal and monetary policies be coordinated such that tight monetary policy is given priority, as this enhances the benefit of nominal exchange rate depreciation. Also, bolstering domestic capacity for the production of import-competing goods is essential.
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    MONETARY AND FISCAL POLICY COORDINATION AND MACROECONOMIC STABILIZATION IN NIGERIA
    (University of Benin, 2014-01-10) OKWUOKEI, JOEL CHIEDU
    In Nigeria, policymakers and researchers acknowledge the importance of policy coordination between the government and the central bank in promoting economic growth and price stability. Yet, what is not understood in the literature is the extent of policy coordination, and whether the performance of the economy could be influenced by the level of coordination. Against this background, the objective of the study was to investigate the extent of monetary and fiscal policy coordination in Nigeria in the context of macroeconomic stabilization, and establish the implications for economic performance. To explore this issue, the study deployed a general framework specifying fiscal and monetary policy reaction functions to characterize the interaction between the government and the central bank. Using annual data, empirical analyses were conducted for the full sample 1980 – 2009, and for sub–periods, 1980–1999, and 2000–2009, applying the Two-Stage Least Squares estimation technique. The major findings are as follows. First, depending on the fiscal measure adopted, fiscal policy was either pro-cyclical, or countercyclical, while monetary policy was generally pro-cyclical. Second, fiscal policy has a significant lag effect on the economy, reflecting delays in federal budgeting. Third, fiscal policy was better than monetary policy in maintaining external balance. Fourth, monetary policy response to economic imbalances, especially to inflation reflects attempt to accommodate fiscal expansion but implied a sacrifice of the price stability objective. Fifth, fiscal and monetary policies displayed inconsistent patterns, partly reflecting incoherent macroeconomic framework for policy coordination. And finally, monetary and fiscal policy coordination lacked empirical support for the full sample and in 1980-1999, while there was ample evidence of coordination during 2000-2009 albeit with role reversal. The results suggest that fiscal policy rather than monetary would have greater influence on output in macroeconomic stabilization in contrast with findings of previous studies. Nevertheless, monetary policy could be useful when fiscal policy fails. Overall, evidence suggests that combining both policies would produce better outcomes. The findings also highlighted the need for diversification of the economy as the best line of defense against downside risk stemming from the strong reliance on the oil sector. In light of the lag effect of fiscal policy, there is the need for measures to minimize, or possibly eliminate delays in federal budgeting. To achieve external balance, attention should focus on curtailing government spending. Furthermore, monetization of fiscal deficit should be avoided. The inconsistent pattern of policy responses calls for an integrated and coherent macroeconomic framework with the fiscal and monetary authorities working closely together to achieve the objectives of economic growth and price stability. Policy coordination is desirable and could be beneficial as it permitted both the government and the central bank to address a wider range of economic issues, which was reflected in the actual performance of output, inflation, and the balance of payment in 2000–2009.
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    EXCHANGE RATE VOLATILITY AND FIRM-LEVEL ECONOMIC ACTIVITIES IN NIGERIA
    (University of Ibadan, 2015-07-06) OLANIPEKUN, DAYO BENEDICT
    Exchange rate volatility (the risk associated with unexpected movements in exchange rate) adversely affects economic activities, both at the micro and macro levels, because it increases uncertainty. Between 1990 and 2012, Nigeria’s exchange rate volatility ranged from 0.1% to 38.8%, while the average annual growth of exports of manufacturing firms declined from 12.7% to -27.4%. Previous studies generally focused on the effects of exchange rate volatility on macroeconomic variables with little attention on firm-level activities. This study, therefore, examined the impact of exchange rate volatility on firmlevel investment, output and export in Nigeria. Three semi-log equations (investment, output and export), based on the theory of the firm, were estimated. Data were collected on 50 manufacturing firms and were classified into oil and gas, food products, beverages, conglomerates, healthcare, agricultural, household durables, industrial goods, printing and publishing, automobile and tyres sub-sectors. The criteria for sample selection were based on data availability and representativeness of the various sub-sectors. Firm-level data were obtained from the firms’ Annual Reports and Financial Statements and macroeconomic data were collected from International Monetary Fund’s International Financial Statistics Year Book. Exchange rate volatility was computed using the Generalized Autoregressive Conditional Heterosckedacity (GARCH) model. The one-step system Generalized Method of Moments (GMM) estimator was used to determine the effects of exchange rate volatility on firm-level investment, output and export, while the Hansen, Sargan and Breusch-Godfrey diagnostic tests were carried out to establish the robustness of the parameter estimates. Statistical significance was determined at the 5% level. Exchange rate volatility had a negative impact on firm-level investment, output and export, with disparities across sub-sectors. A percentage increase in exchange rate volatility reduced firms’ investment by 0.4% and 0.7% in the agricultural and household durable subsectors, respectively. The relatively low reduction of investment in agriculture was attributed to limited imported inputs. On output, a percentage increase in exchange rate volatility reduced firms’ output in the food products, beverages, healthcare, and automobile and tyres sub-sectors by 0.4%, 0.1%, 0.8% and 0.01%, respectively. The effect of exchange rate volatility was lower on firms’ output in the automobile and tyres sub-sector as the firms in the sub-sector earned foreign exchange and were able to hedge against the risk of exchange rate volatility. A percentage increase in exchange rate volatility reduced firms’ export in the food products, beverages and healthcare sub-sectors by 1.1%, 3.1% and 4.0%, in that order. These relatively high percentages suggested that exports by firms in the subsectors would decline significantly in the event of exchange rate volatility. All these results showed that the sampled firms were heavily dependent on external trade which was influenced by exchange rate volatility. Exchange rate volatility led to a decline in firm-level investment, output and export in Nigeria. Effective management of exchange rate by the monetary authority is desirable in order to moderate the adverse effect of exchange rate volatility on firm-level economic activities
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    GOVERNMENT EXPENDITURE, EFFICIENCY, INSTITUTIONAL QUALITY AND ECONOMIC GROWTH IN SUB-SAHARAN AFRICAN COUNTRIES
    (University of Nairobi, 2021-12-16) WANDEDA, DICKSON ONYANGO
    The aim of this thesis was threefold. First, the study scrutinized the role of government spending on output growth for SSA countries. SSA countries’ economic growth has been low compared to other developing regions. Empirical evidence has shown that government expenditure is a significant driver of output growth. However, SSA economic performance has largely lagged despite the increase in government expenditure. The second objective assessed the efficiency of public spending and the sources of inefficiencies in spending across Sub-Saharan African countries. The third objective analysed the role of institutional quality on income variation among Sub-Saharan countries. The issues of institutional quality have been considered to be fundamental in explaining income variation across countries. Botswana’s growth miracle has been achieved by the strong institutions it embraced. This thesis therefore analysed the effect of institutional quality on output growth. In addition, we examined if income variation differs with the income level of SSA countries. Objective one and three adopted dynamic panel data and were estimated using two-step system GMM while taking into account the problem of instrument proliferation. Panel data of 35 SSA countries was considered for the periods 2006-2018. Efficiency score for objective two was achieved by adopting two-step bootstrap output-oriented DEA technique. Both CCR, BCC and scale efficiency were estimated. The study provided evidence that education and health expenditure are key determinants of income growth for SSA. The impact of education spending on cross-country income variation is more effective in low income SSA countries than the middle income SSA countries. However, military expenditure on output growth is more effective in improving income level of middle income SSA countries than low income SSA countries. SSA countries should allocate more funding towards education sector and should also avail compulsory and free primary and secondary education. SSA should carry out health reforms which improve primary health and universal health insurance coverage. The average bias-corrected inefficiency score was 48percent between 2006 and 2018 and the uncorrected spending inefficiency score averaged 32.3percent. Income per capita, secondary school enrolment rate, domestic savings, rule of law, political stability, capital formation, and accountability significantly determine the inefficiencies of government spending across SSA countries. Spending efficiency can be improved through efficient management of public resources. Distortions in SSA government expenditure can be eliminated by designing policies that improve income per capita and institutional quality. Institutional quality plays a significant role on output growth of SSA countries. Government effectiveness contributes more to income growth in middle income countries than in low income SSA countries. There exists regional difference on the effect of institutional quality on economic growth across the four regions of SSA. The contribution of institutional quality to output growth is more effective at the lower level of income and upper level of income than the middle level of income of SSA countries. SSA countries should strengthen institutional bodies that act as checks and balances for government operations. Strategic partnership that promotes civil liberty and independence of institutions should be adopted by SSA member states.