MONETARY AND FISCAL POLICY COORDINATION AND MACROECONOMIC STABILIZATION IN NIGERIA
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Date
2014-01-10
Authors
OKWUOKEI, JOEL CHIEDU
Journal Title
Journal ISSN
Volume Title
Publisher
University of Benin
Abstract
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.