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University of Benin
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.