macroeconomic policies and business cycles in nigeria: 1970-2004 by philip o. alege
TRANSCRIPT
Macroeconomic Policies and Macroeconomic Policies and Business Cycles in Nigeria: Business Cycles in Nigeria:
1970-2004 1970-2004
ByByPhilip O. AlegePhilip O. Alege
A PhD Seminar Presentation in A PhD Seminar Presentation in Partial Fulfillment ofPartial Fulfillment of
The Requirements for the AwardThe Requirements for the Awardof Ph.D. (Economics) ofof Ph.D. (Economics) ofCovenant UniversityCovenant University
Ota.Ota.
Department of Economics and Department of Economics and Development StudiesDevelopment Studies
College of Business and Social College of Business and Social SciencesSciences
Covenant UniversityCovenant University
AbstractAbstract This thesis examines macroeconomic policy and This thesis examines macroeconomic policy and
business cycles in Nigeria over the period 1970 to 2004. business cycles in Nigeria over the period 1970 to 2004. The study is set to fill gaps in three important areas: in-The study is set to fill gaps in three important areas: in-depth study of business cycles in Nigeria; application of depth study of business cycles in Nigeria; application of dynamic stochastic general equilibrium (DSGE) models dynamic stochastic general equilibrium (DSGE) models using the Bayesian technique of solution ,this using the Bayesian technique of solution ,this complements the existing use system-of-equations and complements the existing use system-of-equations and the computable general equilibrium (CGE) models; and the computable general equilibrium (CGE) models; and the investigation of the role of productivity, money supply the investigation of the role of productivity, money supply and external trade play in business cycles. Thus, three and external trade play in business cycles. Thus, three objectives are associated with this work namely establish objectives are associated with this work namely establish and characterize the existence of business cycles in and characterize the existence of business cycles in Nigeria, analyze the sources of business cycle Nigeria, analyze the sources of business cycle fluctuations, and measure the impact of shocks.fluctuations, and measure the impact of shocks.
. Two approaches are used: atheoretical and the . Two approaches are used: atheoretical and the DSGE model which is based on the New DSGE model which is based on the New Keynesian analysis. The first establishes the Keynesian analysis. The first establishes the stylized facts in relation to the existence of stylized facts in relation to the existence of business cycles in Nigeria establishing varying business cycles in Nigeria establishing varying periodicity and volatility. The second method periodicity and volatility. The second method adopts the works of Nason and Cogley (1994) adopts the works of Nason and Cogley (1994) and Scorfheide (2000), but goes beyond these and Scorfheide (2000), but goes beyond these works by incorporating an optimizing export works by incorporating an optimizing export sector. The results obtained, though tentative, sector. The results obtained, though tentative, show that business cycles are propagated by show that business cycles are propagated by productivity, monetary and terms of trade productivity, monetary and terms of trade shocks. Based on the limitations of the study, a shocks. Based on the limitations of the study, a certain number of areas for future research are certain number of areas for future research are highlighted.highlighted.
1.0 INTRODUCTION1.0 INTRODUCTION One of the major concerns of modern macroeconomics One of the major concerns of modern macroeconomics
is the need to understand the causes of macro-economic is the need to understand the causes of macro-economic fluctuations for policy analysis and forecasting because fluctuations for policy analysis and forecasting because of the overall implications for growth and welfare. In of the overall implications for growth and welfare. In general, Less Developed Countries (LDCs) have general, Less Developed Countries (LDCs) have experienced much more periods of frequent fluctuations experienced much more periods of frequent fluctuations (and even longer periods of downturns than upturns) as (and even longer periods of downturns than upturns) as measured by their Gross Domestic Product (GDP) than measured by their Gross Domestic Product (GDP) than their counterparts in the developed economies. In the their counterparts in the developed economies. In the case of Nigeria, injection of oil revenue led to the case of Nigeria, injection of oil revenue led to the creation of the Dutch disease concern in the economy.creation of the Dutch disease concern in the economy.
One of the consequences of volatility in real One of the consequences of volatility in real GDP is the attendant unemployment with its GDP is the attendant unemployment with its financial hardship and loss of identity that it financial hardship and loss of identity that it entails according to Akerlof (2001). entails according to Akerlof (2001). Unemployment, sharp rises in inflation rates, Unemployment, sharp rises in inflation rates, growing size and composition of government growing size and composition of government expenditure and slow growth of the domestic expenditure and slow growth of the domestic production are major macroeconomic problems production are major macroeconomic problems and hence the study of the occurrence of peaks and hence the study of the occurrence of peaks and trough in macroeconomic activities known and trough in macroeconomic activities known as business cycle become critical in Nigeria. as business cycle become critical in Nigeria. These outcomes are traced to multiplicity of These outcomes are traced to multiplicity of exogenous and endogenous shocks which in the exogenous and endogenous shocks which in the case of Nigeria have combined to generate and case of Nigeria have combined to generate and propagate business cycles.propagate business cycles.
The main objective of this study is to examine The main objective of this study is to examine macroeconomic policies and business cycles in the macroeconomic policies and business cycles in the Nigerian economy. There are three objectives associated Nigerian economy. There are three objectives associated with this work namely establish and characterize the with this work namely establish and characterize the existence of business cycle in Nigeria, analyze the existence of business cycle in Nigeria, analyze the sources of business cycle fluctuations and measure the sources of business cycle fluctuations and measure the impact of shocks. The research hypotheses subjected to impact of shocks. The research hypotheses subjected to test in this study include (1) no business cycle fluctuations test in this study include (1) no business cycle fluctuations existed in the Nigerian economy during the study period; existed in the Nigerian economy during the study period; (2) no co-movement between the GDP and its main (2) no co-movement between the GDP and its main components in Nigeria between 1970 and 2004; (3) A components in Nigeria between 1970 and 2004; (3) A shock to the economy does not alter the course of the shock to the economy does not alter the course of the RGDP, private consumption, unemployment rate, interest RGDP, private consumption, unemployment rate, interest rate, inflation rate, total export, total import, crude oil rate, inflation rate, total export, total import, crude oil export, among others; and (4) nominal or real export, among others; and (4) nominal or real macroeconomic variables does not affect Nigeria’s macroeconomic variables does not affect Nigeria’s business cycle fluctuations. business cycle fluctuations.
Two approaches were adopted in addressing the objectives Two approaches were adopted in addressing the objectives of the study: atheoretical statistical method, and formal of the study: atheoretical statistical method, and formal application of dynamic stochastic general equilibrium (DSGE) application of dynamic stochastic general equilibrium (DSGE) model. The former describes the time series properties of the model. The former describes the time series properties of the data culminating in characterizing business fluctuations in data culminating in characterizing business fluctuations in Nigeria and documenting the stylized facts. In examining the Nigeria and documenting the stylized facts. In examining the other major concern of this study, a macroeconomic model is other major concern of this study, a macroeconomic model is developed in an attempt to provide answers to the sources developed in an attempt to provide answers to the sources and policy implications of business cycles in Nigeria. In this and policy implications of business cycles in Nigeria. In this respect, the study begins with the Real Business Cycle respect, the study begins with the Real Business Cycle (RBC) methodology and broadens it with nominal factors in (RBC) methodology and broadens it with nominal factors in the spirit of Dynamic Stochastic General Equilibrium (DSGE) the spirit of Dynamic Stochastic General Equilibrium (DSGE) model based on New-Keynesian theory. This methodological model based on New-Keynesian theory. This methodological approach will complement the existing use of a system of approach will complement the existing use of a system of equations or the Computable General Equilibrium models equations or the Computable General Equilibrium models (CGEMs). Section 2, reviews the literature. In Section 3, the (CGEMs). Section 2, reviews the literature. In Section 3, the theoretical framework and research methodology is theoretical framework and research methodology is presented. Sections 4, 5, and 6 present the atheoretical presented. Sections 4, 5, and 6 present the atheoretical approach results, the DSGE model results, and policy approach results, the DSGE model results, and policy analysis, respectively. Section 7 concludes.analysis, respectively. Section 7 concludes.
2.0 LITERATURE REVIEW2.0 LITERATURE REVIEW Quite distinctly from the old paradigm of business cycles, the events Quite distinctly from the old paradigm of business cycles, the events
of the 1920’s in the USA and in Europe triggered off a new wave of of the 1920’s in the USA and in Europe triggered off a new wave of intellectual appraisal of the phenomenon after the Second World intellectual appraisal of the phenomenon after the Second World War.War. It was the Great Depression (GD) that gave birth to modern It was the Great Depression (GD) that gave birth to modern macroeconomics and in particular the rise in interest in business macroeconomics and in particular the rise in interest in business cycle analysis after World War II. The phenomenon described as cycle analysis after World War II. The phenomenon described as business cycle predates the agricultural and the industrial business cycle predates the agricultural and the industrial revolutions. It is observed that when the industrial economies were revolutions. It is observed that when the industrial economies were predominantly agricultural, fluctuations in climate exerted a strong predominantly agricultural, fluctuations in climate exerted a strong influence on business cycles. History has also documented various influence on business cycles. History has also documented various types of business cycles. The major ones include the Kitchin types of business cycles. The major ones include the Kitchin inventory cycle of 3-5 years identified by Joseph Kitchin in 1923. inventory cycle of 3-5 years identified by Joseph Kitchin in 1923. There are the Kuznets infrastructural investment cycles of 15-25 There are the Kuznets infrastructural investment cycles of 15-25 years proposed by Simon Kuznets in 1958.There is also the years proposed by Simon Kuznets in 1958.There is also the Kondratiev wave or cycle of between 45 and 60 years popularized Kondratiev wave or cycle of between 45 and 60 years popularized by Nikolai Kondratiev in 1922. The Jugular fixed investment cycle by Nikolai Kondratiev in 1922. The Jugular fixed investment cycle (7-11 years) was identified by Clement Jugular in the 1860s.(7-11 years) was identified by Clement Jugular in the 1860s.
However, cycles observed after the Second However, cycles observed after the Second World War were generally more restrained and World War were generally more restrained and influence of government in fiscal and monetary influence of government in fiscal and monetary policies became dominant. Business cycle is a policies became dominant. Business cycle is a wave/swing in economic activities and is wave/swing in economic activities and is characterized by four distinct phases of boom-characterized by four distinct phases of boom-recession-depression-recovery. In this respect, recession-depression-recovery. In this respect, the Great Depression is also a business cycle the Great Depression is also a business cycle but of greater magnitude i.e. one in which the but of greater magnitude i.e. one in which the economic aggregates behave as in any other economic aggregates behave as in any other business cycle but with greater variance in their business cycle but with greater variance in their oscillation. oscillation.
Several theories have emerged to explain the GD Several theories have emerged to explain the GD based on different schools of thought including based on different schools of thought including the classical, monetarist, the new classical, the the classical, monetarist, the new classical, the Keynesian and the new Keynesians (NKS). In Keynesian and the new Keynesians (NKS). In general, the NKS share common features with general, the NKS share common features with the earlier generations of RBC by retaining the the earlier generations of RBC by retaining the idea that technology shocks can be quite idea that technology shocks can be quite important in shaping the dynamic behaviour of important in shaping the dynamic behaviour of key macroeconomic variables (Ireland, 2004). key macroeconomic variables (Ireland, 2004). The proponents of this school believe that other The proponents of this school believe that other shocks might be important and in particular that shocks might be important and in particular that the presence of nominal price rigidities “helps the presence of nominal price rigidities “helps determine exactly how shocks of all kinds impact determine exactly how shocks of all kinds impact on and propagate through the economy”. Their on and propagate through the economy”. Their popular model is the dynamic stochastic general popular model is the dynamic stochastic general equilibrium model, DSGEM.equilibrium model, DSGEM.
Thus, based on formal DSGEM, NKS proponents Thus, based on formal DSGEM, NKS proponents have been examining quantitatively and with the have been examining quantitatively and with the aid of econometric methods the features and aid of econometric methods the features and business cycle fluctuations of an economy. In business cycle fluctuations of an economy. In general, their results have reinforced the general, their results have reinforced the conclusion that nominal shocks are as well conclusion that nominal shocks are as well important as technology shocks. In spite of its important as technology shocks. In spite of its small size, the DSGEM is popular among small size, the DSGEM is popular among researchers including Mankiw (1989), Clarida, researchers including Mankiw (1989), Clarida, Gali and Gertler (1999) and Negro and Gali and Gertler (1999) and Negro and Schorfheide (2003). Schorfheide (2003).
Business cycle models can be divided into two broad Business cycle models can be divided into two broad categories. On the one hand, there are business cycle categories. On the one hand, there are business cycle theories that regard cycles as a failure of the economic theories that regard cycles as a failure of the economic system. On the other hand, there is a class of model that system. On the other hand, there is a class of model that regards business cycles as the optimal reaction of the regards business cycles as the optimal reaction of the economy to unavoidable shocks. In this respect, shocks economy to unavoidable shocks. In this respect, shocks are propagated through intertemporal substitution within are propagated through intertemporal substitution within an efficient market mechanism. In this explanation, an efficient market mechanism. In this explanation, technological shocks are considered to be the main technological shocks are considered to be the main course of economic fluctuations (Kydland and Prescott, course of economic fluctuations (Kydland and Prescott, 1982). Other sources of shocks according to Rebelo 1982). Other sources of shocks according to Rebelo (2005) are: oil shocks, monetary shocks, fiscal shocks, (2005) are: oil shocks, monetary shocks, fiscal shocks, investment-specific technical change, and news shocks.investment-specific technical change, and news shocks.
One of the major outcomes of business cycle One of the major outcomes of business cycle research is the documentation of the business research is the documentation of the business cycle stylized facts. These facts form bases to cycle stylized facts. These facts form bases to understanding the structure of the model understanding the structure of the model economy, drawing scientific inferences and economy, drawing scientific inferences and forecasting. The stylized facts illustrate how the forecasting. The stylized facts illustrate how the model mimic the model economy or to what model mimic the model economy or to what extent the model could be used in policy making. extent the model could be used in policy making. The main facts which business cycle models The main facts which business cycle models suggest from the literature include the following suggest from the literature include the following that real GDP is persistent; all component of that real GDP is persistent; all component of spending are pro-cyclical; consumption is less spending are pro-cyclical; consumption is less volatile than investment; imports and exports volatile than investment; imports and exports fluctuate less than investment but more than fluctuate less than investment but more than consumption among others. consumption among others.
This study also documents business cycle models as This study also documents business cycle models as contained in Nason and Cogley (1994), Scorfheide (2000, contained in Nason and Cogley (1994), Scorfheide (2000, 2003), An and Schorfheide (2005), and Lucas (1987). The 2003), An and Schorfheide (2005), and Lucas (1987). The nature and structure of these models made them difficult nature and structure of these models made them difficult to handle analytically hence the use of numerical to handle analytically hence the use of numerical computational methods (Aruoba, Fernandez-Villaverde computational methods (Aruoba, Fernandez-Villaverde and Rubio-Ramirez , 2003). Of importance also are the and Rubio-Ramirez , 2003). Of importance also are the estimation techniques. There is calibration approach (see estimation techniques. There is calibration approach (see Kydland and Prescott, 1982; Canova, 1994; Canova and Kydland and Prescott, 1982; Canova, 1994; Canova and Ortega, 1996, and Pesaran and Smith, 1992). This Ortega, 1996, and Pesaran and Smith, 1992). This method is an unorthodox procedure for selecting the method is an unorthodox procedure for selecting the parameters of a model which can be viewed as a easier parameters of a model which can be viewed as a easier way to evaluate models. way to evaluate models.
The approach ensures that the theoretical moments of the The approach ensures that the theoretical moments of the model match the data as closely as possible. There are model match the data as closely as possible. There are also the Generalized Method of Moments (GMM) (Linde, also the Generalized Method of Moments (GMM) (Linde, 2005) and Maximum Likelihood Estimation (MLE). A 2005) and Maximum Likelihood Estimation (MLE). A major weakness of the MLE method stems from the fact major weakness of the MLE method stems from the fact that the parameters of the model being estimated are that the parameters of the model being estimated are prone to taking corner solutions or implausible values. It is prone to taking corner solutions or implausible values. It is also proven that the likelihood function may be flat in also proven that the likelihood function may be flat in some directions (Welz, 2005:19). In recent times some directions (Welz, 2005:19). In recent times Bayesian approach has taken the stage in estimating Bayesian approach has taken the stage in estimating parameters of DSGE models. One of the advantages of parameters of DSGE models. One of the advantages of the Bayesian method is that it incorporates uncertainties the Bayesian method is that it incorporates uncertainties and prior information in the parameterization of the model. and prior information in the parameterization of the model. It can cope with potential model misspecification and It can cope with potential model misspecification and possible lack of identification of the parameters of interest. possible lack of identification of the parameters of interest. (see Ramos,undated:6; Medina and Soto ,2005; and (see Ramos,undated:6; Medina and Soto ,2005; and Lubik and Schorfheide, 2005).Lubik and Schorfheide, 2005).
In the light of the advantages adduced to in the preceding In the light of the advantages adduced to in the preceding paragraphs, several authors have employed the paragraphs, several authors have employed the Bayesian technique in estimating DSGE models. Some of Bayesian technique in estimating DSGE models. Some of them, as cited by Griffoli (2007:81) include Schorfheide them, as cited by Griffoli (2007:81) include Schorfheide (2002), Lubik and Schorfheide (2003), Smets and (2002), Lubik and Schorfheide (2003), Smets and Wouters (2003), Ireland (2004), Fernandez-Villaverde Wouters (2003), Ireland (2004), Fernandez-Villaverde and Rubio-Ramirez (2004), Lubik and Schorfheide and Rubio-Ramirez (2004), Lubik and Schorfheide (2005), and Rabanal and Rubio-Ramirez (2005). The (2005), and Rabanal and Rubio-Ramirez (2005). The literature has methods for identfying business cycles literature has methods for identfying business cycles (Agenor et al., 2000). It has also produced (Agenor et al., 2000). It has also produced datadata filtering filtering processes: Hodrick-Prescott (HP), Bandpass, Kalman processes: Hodrick-Prescott (HP), Bandpass, Kalman filter. The filters identify trend (T), seasonal variation (S) filter. The filters identify trend (T), seasonal variation (S) and irregular variation (I) in time series ( Canova, 1998 as and irregular variation (I) in time series ( Canova, 1998 as contained in Baldini, 2005:10) and (Corbae, Ouliaris, and contained in Baldini, 2005:10) and (Corbae, Ouliaris, and Phillips, 2002).Phillips, 2002).
Alternatively, in the original concept, HP filter is a Alternatively, in the original concept, HP filter is a moving average filter of wide applications to moving average filter of wide applications to obtain a smooth estimate of the long-term trend obtain a smooth estimate of the long-term trend component of a series. It removes a smooth component of a series. It removes a smooth trend from some given data by solving the trend from some given data by solving the following equation:following equation:
The business cycle component will then be The business cycle component will then be measured as the deviation from the trend. The measured as the deviation from the trend. The parameter in the equation above controls for the parameter in the equation above controls for the smoothness of the trend series by penalizing the smoothness of the trend series by penalizing the acceleration in the trend relative to the business acceleration in the trend relative to the business cycle component.cycle component.
22
1 1minT
t t t t tn
y
The business cycle component will then be The business cycle component will then be measured as the deviation from the trend. measured as the deviation from the trend. The parameter in the equation above The parameter in the equation above controls for the smoothness of the trend controls for the smoothness of the trend series by penalizing the acceleration in the series by penalizing the acceleration in the trend relative to the business cycle trend relative to the business cycle component.component.
There is a very rich stock of empirical literature There is a very rich stock of empirical literature on business cycle studies since the path on business cycle studies since the path breaking paper of Kydland and Prescott (1982). breaking paper of Kydland and Prescott (1982). That work gave credence to Real Business That work gave credence to Real Business Cycle, RBC, models which have been able to Cycle, RBC, models which have been able to explain, to a large extent, the behavior of actual explain, to a large extent, the behavior of actual economies. Some evidences from the literature economies. Some evidences from the literature include: Kydland and Prescott (1982), Shapiro include: Kydland and Prescott (1982), Shapiro and Watson (1988) on the USA data. Maussner and Watson (1988) on the USA data. Maussner and Spatz (2001) on Germany data; and Spatz (2001) on Germany data; Christodulakis, Dimeli and Kollintzas (1995) and Christodulakis, Dimeli and Kollintzas (1995) and Smet and Wouters (2002) on European data. Smet and Wouters (2002) on European data.
From the Asian economy, we document the From the Asian economy, we document the following: Hofmaiser and Roldos (1997) and Kim, following: Hofmaiser and Roldos (1997) and Kim, Kose and Plummer (undated). From Latin Kose and Plummer (undated). From Latin America, we have Bergoeing and Soto (2000) on America, we have Bergoeing and Soto (2000) on Chilean data and Kydland and Zarazaga (1997) Chilean data and Kydland and Zarazaga (1997) on Argentina. Development in business cycle on Argentina. Development in business cycle research is very slow in Africa South of Sahara. research is very slow in Africa South of Sahara. Most of the existing ones have a generalized Most of the existing ones have a generalized cross-country approach (Agenor, McDermont and cross-country approach (Agenor, McDermont and Presad (2000). In the case of Nigeria, literature Presad (2000). In the case of Nigeria, literature on business cycle phenomenon is a scarce on business cycle phenomenon is a scarce commodity. commodity.
Most of the available research works on Most of the available research works on macroeconomic fluctuations have used macroeconomic fluctuations have used various methods including short-run various methods including short-run macro-models or using technique of macro-models or using technique of analysis such as vector autoregressive analysis such as vector autoregressive (VAR) and Total Factor Productivity (TFP) (VAR) and Total Factor Productivity (TFP) to capture short-run fluctuations in the to capture short-run fluctuations in the economy (Olaloye 1985, Adenikinju and economy (Olaloye 1985, Adenikinju and Alaba 1998, Chete and Adenikinju 1995, Alaba 1998, Chete and Adenikinju 1995, 1996 and Loto ,2002). 1996 and Loto ,2002).
In an attempt to introduce new dimensions to In an attempt to introduce new dimensions to macroeconomic modeling in Nigeria, Olekah and macroeconomic modeling in Nigeria, Olekah and Oyaromade (2007), estimated a DSGE model for Oyaromade (2007), estimated a DSGE model for the Nigerian economy. This model appears to be the Nigerian economy. This model appears to be one of the earliest DSGEMs on Nigeria. The one of the earliest DSGEMs on Nigeria. The paper presents a small-scale DSGE model of the paper presents a small-scale DSGE model of the Nigerian economy with the aim of aiding Nigerian economy with the aim of aiding monetary policy decisions. The authors employ monetary policy decisions. The authors employ Vector Autoregessive (VAR) method of Vector Autoregessive (VAR) method of estimation. The results show that changes in estimation. The results show that changes in prices are influenced mainly by volatility in real prices are influenced mainly by volatility in real output while exchange rate and inflation account output while exchange rate and inflation account for significant proportion of the variability in for significant proportion of the variability in interest rate. interest rate.
3. Theoretical Framework and 3. Theoretical Framework and Research MethodologyResearch Methodology
Given the apparent disequilibrium between demand and Given the apparent disequilibrium between demand and supply in the Nigerian economy, the study has opted for supply in the Nigerian economy, the study has opted for the New Keynesian School (NKS) of thought approach the New Keynesian School (NKS) of thought approach as the theoretical base of this study. The NKS is based as the theoretical base of this study. The NKS is based on sticky wages and prices to explain the existence of on sticky wages and prices to explain the existence of involuntary unemployment and non-neutrality of money involuntary unemployment and non-neutrality of money in an economy. One of the characteristics of the NKS is in an economy. One of the characteristics of the NKS is that it is firmly rooted in the microeconomic foundation of that it is firmly rooted in the microeconomic foundation of macroeconomics. In the case of microeconomic macroeconomics. In the case of microeconomic analysis, each economic agent maximizes its utility or analysis, each economic agent maximizes its utility or profit function subject to a certain set of constraints, from profit function subject to a certain set of constraints, from the first principles. The results of such optimizing the first principles. The results of such optimizing behaviors form a set of equations which are incorporated behaviors form a set of equations which are incorporated within a NK macroeconomic framework. within a NK macroeconomic framework.
The other attractions of the NKS include the following: it The other attractions of the NKS include the following: it is based on rational expectations; it can accommodate is based on rational expectations; it can accommodate several economic agents; it requires market institutional several economic agents; it requires market institutional set-up such as the assumption of monopolistic set-up such as the assumption of monopolistic competition; relates its theoretical construction to competition; relates its theoretical construction to empirically quantifiable model through the application of empirically quantifiable model through the application of quantitative dynamic stochastic general equilibrium quantitative dynamic stochastic general equilibrium model (DSGEM). The latter has become the workhorse model (DSGEM). The latter has become the workhorse of the modern approach to business cycle analysis; and of the modern approach to business cycle analysis; and falls within the body of knowledge called the modern falls within the body of knowledge called the modern macroeconomics in as much as it is concerned with the macroeconomics in as much as it is concerned with the evolution of practicable macroeconomics that engenders evolution of practicable macroeconomics that engenders bi-directional causality between theory and policy.bi-directional causality between theory and policy.
The DSGE model presented in the study adopts Nason The DSGE model presented in the study adopts Nason and Cogley (1994), Schorfeide (2000), and Bergoeing and Cogley (1994), Schorfeide (2000), and Bergoeing and Soto (2002) model which in itself has its origin in and Soto (2002) model which in itself has its origin in Cooley and Hansen (1989) and McGrattan (1994). The Cooley and Hansen (1989) and McGrattan (1994). The latter models are logical extensions of the original latter models are logical extensions of the original Kydland and Prescott (1982) model. The choice of the Kydland and Prescott (1982) model. The choice of the works of Nason and Cogley as well as Schorfheide is works of Nason and Cogley as well as Schorfheide is premised on the need to approximate Nigerian economic premised on the need to approximate Nigerian economic environment with models that address monetary issues environment with models that address monetary issues and business cycles. In effect, the trend in some and business cycles. In effect, the trend in some macroeconomic indicators shows that Nigeria macroeconomic indicators shows that Nigeria experienced sharp volatility in inflation, unprecedented experienced sharp volatility in inflation, unprecedented monetary injection into the economy, and dependence monetary injection into the economy, and dependence on external economy is enormous coupled with a on external economy is enormous coupled with a palpable political history which can be described as palpable political history which can be described as political business cycle. political business cycle.
The model assumes five agents in the The model assumes five agents in the economy: the household, firms, the economy: the household, firms, the financial intermediary, the export sector financial intermediary, the export sector and the monetary authorities. The and the monetary authorities. The optimizing behavior of the agents can be optimizing behavior of the agents can be summarized in the following equations:summarized in the following equations:
0
1
max (1 ) ln ln(1 ) .0, , ,t t t t
tE C Ht t
tC H M D
..........................................t t t t t tPC M D WH
0 .................................................................tD
1 , ...............t t t H t t t t t t t tM f b R D W H M D PC
0
1 11
1max ...............0, , ,
t
t tt t t t
FtEC PtF K N L
1
1 ,1 ..............................t t t t t t t t t t t F tF L P K Z N K K W N L R
....................................................W N Lt t t
0
, , 1 1
1max ..............................................1t t t
t
B L D t t
BtEC Pt
, , ......t F t t H t t t tB D R L R D L Xt
..........................................................t t tL X D
1
0
t
tt t t t
t
PD XD PX EXMax E
1
(1 )t t t tY A EX XD
1 ,ln ln ......................t t z tz z
*1 ,ln (1 )ln lnt t M tm m m
1 01tt rp t rp rprp rp rp
It is evident that this system cannot be estimated as they It is evident that this system cannot be estimated as they are presented. These equations are characterized by are presented. These equations are characterized by multiple objective functions, the presence of forward-multiple objective functions, the presence of forward-looking and backward-looking variables, uncertainties, looking and backward-looking variables, uncertainties, and shocks to the system. Literature in this branch of and shocks to the system. Literature in this branch of study contends the fact that this class of DSGE models study contends the fact that this class of DSGE models can not be solved analytically. Consequently, a numerical can not be solved analytically. Consequently, a numerical method is adopted which makes use of the model’s method is adopted which makes use of the model’s structure and the first order conditions as suggested by structure and the first order conditions as suggested by Christiano and Eichenbaum (1992). This will lead to the Christiano and Eichenbaum (1992). This will lead to the equilibrium system of the equations. One of the methods equilibrium system of the equations. One of the methods being suggested is the Hansen and Prescott’s (1995) being suggested is the Hansen and Prescott’s (1995) technique. It should be noted that there are apparent technique. It should be noted that there are apparent complexity and computational difficulties in measuring the complexity and computational difficulties in measuring the significance of coefficient in a system of multi –equations significance of coefficient in a system of multi –equations models (Ige, 1982: 1). models (Ige, 1982: 1).
Conceptually, the household problem is a Conceptually, the household problem is a dynamic programming problem which can be dynamic programming problem which can be solved using the Bellman’s criterion. Solving the solved using the Bellman’s criterion. Solving the model thus requires the following steps: writing model thus requires the following steps: writing down the model, deriving the equilibrium system down the model, deriving the equilibrium system of equations, solving for steady-state of equations, solving for steady-state equilibrium, and calibrating/estimating the equilibrium, and calibrating/estimating the parameters of the models. Thus, in solving the parameters of the models. Thus, in solving the problem the study draws from Aruoba et al. problem the study draws from Aruoba et al. (2003). This study, adopts the first-order (2003). This study, adopts the first-order perturbation or log-linearization method in order perturbation or log-linearization method in order to solve the system of rational expectation to solve the system of rational expectation model being presented. The log-linearization model being presented. The log-linearization method being proposed requires going through method being proposed requires going through some procedures. some procedures.
To solve this system of equations, decentralized To solve this system of equations, decentralized optimization technique is often used in order to find the optimization technique is often used in order to find the first order conditions. In this respect, each agent first order conditions. In this respect, each agent maximizes its own objective. It should be noted that the maximizes its own objective. It should be noted that the dynamic optimization alluded to above is equivalent to dynamic optimization alluded to above is equivalent to the lagrangian method. With the latter approach, we the lagrangian method. With the latter approach, we define the Lagrangian function or the Bellman equation define the Lagrangian function or the Bellman equation with a view to finding the necessary conditions and with a view to finding the necessary conditions and resolving the system of equations in order to get the resolving the system of equations in order to get the demand functions of the control variables. The other demand functions of the control variables. The other steps in solving the model are finding the steady state, steps in solving the model are finding the steady state, log-linearization around the steady state and solving the log-linearization around the steady state and solving the model for the recursive law of motion. The model can model for the recursive law of motion. The model can then be estimated and simulated in the detrended form then be estimated and simulated in the detrended form of the variables of the variables
Technique of Estimating the Technique of Estimating the DSGEM for NigeriaDSGEM for Nigeria
The estimation/simulation of the DSGE-VAR is achieved The estimation/simulation of the DSGE-VAR is achieved by the use of DYNARE codes (MATLAB version). The by the use of DYNARE codes (MATLAB version). The choice of this software package is informed by being choice of this software package is informed by being relatively user friendly. Griffoli (2007:2) says ‘DYNARE is relatively user friendly. Griffoli (2007:2) says ‘DYNARE is a powerful and highly customizable engine with an a powerful and highly customizable engine with an intuitive front-end interface to solve, simulate, and intuitive front-end interface to solve, simulate, and estimate DSGE models. It is a pre-processor and a estimate DSGE models. It is a pre-processor and a collection of MATLAB routine. In general, DYNARE is collection of MATLAB routine. In general, DYNARE is able to compute the steady state, compute the solution able to compute the steady state, compute the solution of the deterministic models, compute the first and of the deterministic models, compute the first and second order approximation to solutions of stochastic second order approximation to solutions of stochastic models, estimate parameters of DSGE models using models, estimate parameters of DSGE models using either a maximum likelihood or Bayesian approach, and either a maximum likelihood or Bayesian approach, and compute optimal policies in linear-quadratic models.compute optimal policies in linear-quadratic models.
Sources and Measurement of Sources and Measurement of DataData
Two sets of data are used in this study namely Two sets of data are used in this study namely annual and quarterly. The annual data are used annual and quarterly. The annual data are used in testing the first objective of the study. They in testing the first objective of the study. They are mainly sourced from domestic data are mainly sourced from domestic data producers. The thrust of using this set of data producers. The thrust of using this set of data lies in the larger number of variables obtainable lies in the larger number of variables obtainable thus helping us to show the existence of thus helping us to show the existence of business cycle in Nigeria beyond reasonable business cycle in Nigeria beyond reasonable doubt. The quarterly data used in this thesis are doubt. The quarterly data used in this thesis are obtained from the International Financial obtained from the International Financial Statistics (IFS) published by International Statistics (IFS) published by International Monetary Fund (IMF). Monetary Fund (IMF).
They are available in annual and quarterly They are available in annual and quarterly forms. Their availability in this form enables us forms. Their availability in this form enables us to tackle the problem of missing values which to tackle the problem of missing values which occurred in the quarterly data. To bridge this occurred in the quarterly data. To bridge this gap we used the Gandalfo algorithm to covert gap we used the Gandalfo algorithm to covert the annual data to quarterly. The variables in the annual data to quarterly. The variables in this category are household consumption this category are household consumption expenditure (code 171), government expenditure (code 171), government consumption expenditure (code 172), gross consumption expenditure (code 172), gross fixed capital formation (code 173), exports of fixed capital formation (code 173), exports of goods/services (code 175), imports of goods/services (code 175), imports of goods/services (code 176), GDP vol. goods/services (code 176), GDP vol. (2000=100) (code 183), and GDP deflator (2000=100) (code 183), and GDP deflator (2000=100) (code 184).(2000=100) (code 184).
4.0 CHARACTERIZING BUSINESS CYCLE 4.0 CHARACTERIZING BUSINESS CYCLE FLUCTUATIONS IN NIGERIAFLUCTUATIONS IN NIGERIA
This chapter documents business cycle stylized facts This chapter documents business cycle stylized facts with a view to demonstrate that business cycles do exist with a view to demonstrate that business cycles do exist and identify the shocks that drive the Nigerian economy. and identify the shocks that drive the Nigerian economy. The results of this exercise form the basis for an attempt The results of this exercise form the basis for an attempt at quantitative assessment of the business cycle at quantitative assessment of the business cycle phenomenon in the Nigeria economy using the DSGE phenomenon in the Nigeria economy using the DSGE model. We performed the standard unit root test using model. We performed the standard unit root test using the augmented Dickey-Fuller tests on the raw data to the augmented Dickey-Fuller tests on the raw data to establish stationarity status of the variables. The tests establish stationarity status of the variables. The tests showed that virtually all the series were non-stationary in showed that virtually all the series were non-stationary in levels. However, they became stationary I(0) series at levels. However, they became stationary I(0) series at first difference of the series. This procedure is very first difference of the series. This procedure is very important in computing the correlations of non-stationary important in computing the correlations of non-stationary raw data.raw data.
We discussed the cross-correlation pattern We discussed the cross-correlation pattern between RGDP and its components and between RGDP and its components and attempted to identify a set of business cycle attempted to identify a set of business cycle regularities using other statistics such as regularities using other statistics such as volatility, relative volatility, contemporaneous volatility, relative volatility, contemporaneous correlation, and phase shift to establish cyclical correlation, and phase shift to establish cyclical behaviour. We also highlighted similarities and behaviour. We also highlighted similarities and differences between our results and those of differences between our results and those of other studies based on Argentina and U.S.A. We other studies based on Argentina and U.S.A. We investigated the real and nominal facts of the investigated the real and nominal facts of the macroeconomic variables with a view to macroeconomic variables with a view to documenting the type of shocks that documenting the type of shocks that characterized the economy.characterized the economy.
From the results obtained some preliminary remarks on the From the results obtained some preliminary remarks on the implications of our analysis could be made. First, the implications of our analysis could be made. First, the Nigerian macroeconomic time series data indicate clear Nigerian macroeconomic time series data indicate clear business cycle regularities. They indicated two full cycles business cycle regularities. They indicated two full cycles of 19 years and 13 years. Second, the business cycle of 19 years and 13 years. Second, the business cycle frequencies of the Nigerian macroeconomic data are frequencies of the Nigerian macroeconomic data are similar to those of other developing and industrial similar to those of other developing and industrial economies. Third, the results suggest that the business economies. Third, the results suggest that the business cycle of Nigeria is informed by real and nominal facts. cycle of Nigeria is informed by real and nominal facts. Four, our analysis was limited to the use of only one Four, our analysis was limited to the use of only one detrending technique. It will be necessary to use more detrending technique. It will be necessary to use more filters in order to ensure robustness of the results. Five, filters in order to ensure robustness of the results. Five, these tentative results are based on annual data. However, these tentative results are based on annual data. However, it would be necessary to envisage the implications of using it would be necessary to envisage the implications of using quarterly data. Table 4.1 contains summary of results.quarterly data. Table 4.1 contains summary of results.
Table 4.1: Business Cycle Stylized Facts for NigeriaTable 4.1: Business Cycle Stylized Facts for NigeriaVariable Definition Volatility
(SDx) %Relative Volatility
(SDx/SDGDP ) Degree of Co-
movementPhase Shift
RGDP Real GDP 7.95
CRUDEO Crude Oil Production 23.35 2.9 Pro-cyclical Lagging
INDO Index of Industrial Production 55.57 6.99 Pro-cyclical Leading
AGRO Index of Agricultural Production
7.42 0.93 Pro-cyclical Lagging
RUEM Rate of Unemployment 52.92 6.66 Pro-cyclical Lagging
PCON Total Private Consumption 20.44 2.57 Pro-cyclical Lagging
GRI Gross Fixed Investment 33.7 4.25 Pro-cyclical Lagging
RGI Government Revenue 34.61 4.35 Pro-cyclical Lagging
RGE Government Consumption Expenditure
67.60 8.50 Pro-cyclical Leading
INFR Inflation Rate 88.74 11.16 Countercyclical Leading
AWR Average Wage Rate 52.92 11.16 Pro-cyclical Lagging
RM1 Real Narrow Money Supply 45.64 5.74 Pro-cyclical Leading
RM2 Real Broad Money Supply 37.23 4.68 Pro-cyclical Leading
PLRR Prime Lending Rate 22.11 2.78 Countercyclical Leading
RTEX Total Export 33.94 4.27 Pro-cyclical Lagging
NOILEX Non-oil Export 42.60 5.36 Pro-cyclical Lagging
CRUDEX Crude Oil Export 36.19 4.55
NOILIM Non-oil Import 33.77 4.25 Pro-cyclical Leading
OILIM Oil Import 69.37 8.73 Pro-cyclical Leading
RTIM Total Import 30.78 3.87 Pro-cyclical Lagging
EER Exchange Rate Fluctuation 33.30 4.19 Countercyclical Leading
5.0 Estimation of the DSGE Model of the 5.0 Estimation of the DSGE Model of the Nigerian EconomyNigerian Economy
5.15.1 Presentation of ResultsPresentation of Results One other main goal of this study is to provide a One other main goal of this study is to provide a
framework for understanding business cycle framework for understanding business cycle fluctuations in Nigeria. As we have already noted fluctuations in Nigeria. As we have already noted earlier, constructing models in the spirit of DSGE will earlier, constructing models in the spirit of DSGE will provide reliable answers to substantive economic provide reliable answers to substantive economic questions. In this study, obtaining preliminary values questions. In this study, obtaining preliminary values for the parameters of the model is done through for the parameters of the model is done through calibration. The model will then be simulated. calibration. The model will then be simulated. Estimations are undertaken using DYNARE codes, Estimations are undertaken using DYNARE codes, MATLAB version. This package for solving the MATLAB version. This package for solving the DSGEM is holistic as it is specifically designed to DSGEM is holistic as it is specifically designed to address business cycle models based on DSGE for address business cycle models based on DSGE for which the Bayesian has been chosen.which the Bayesian has been chosen.
CalibrationCalibration
In this study and in view of relative scarcity In this study and in view of relative scarcity of data from similar studies as the one of data from similar studies as the one being attempted in this study in Nigeria, being attempted in this study in Nigeria, we adopt the calibrated parameters from we adopt the calibrated parameters from Scorfheide (2000) as contained in Scorfheide (2000) as contained in DYNARE package fs2000a example. This DYNARE package fs2000a example. This approach is common to a host of business approach is common to a host of business cycle studies (See Bergoeing and Soto, cycle studies (See Bergoeing and Soto, 2002 and Weltz, 2005). 2002 and Weltz, 2005).
Table 5.1: Estimated Parameters Using Bayesian Table 5.1: Estimated Parameters Using Bayesian MethodMethod
Parameter Calibrated *DSGEM Estimates **
: discount factor 0.99 0.9995
: depreciation rate 0.02 0.0031
: output elasticity of capital 0.33 0.3457
: deterministic trend of technology 0.003 0.0010
: consumption-output ratio 0.787 0.6405
: steady state money supply 1.011 1.0251
: persistence (autocorrelation coeff.) 0.70 0.1287
mst
Source: (*) Scorfheide (2000) examples in DYNARE codes, Matlab version (**) Table 5.5 of this study
These parameters are contained in Section 3.3: Equations to be estimated.
ResultsResults
The DSGE model being estimated here is one that has The DSGE model being estimated here is one that has been augmented by a Vector Autoregressive (VAR) been augmented by a Vector Autoregressive (VAR) representation. Consequently, the model solved was representation. Consequently, the model solved was through the process of estimation/simulation of the DSGE-through the process of estimation/simulation of the DSGE-VAR method (Ireland 2004, and Liu, Gupta and Schaling VAR method (Ireland 2004, and Liu, Gupta and Schaling 2007:5). This estimation/simulation process uses the 2007:5). This estimation/simulation process uses the Bayesian-based DYNARE (Matlab version) package. The Bayesian-based DYNARE (Matlab version) package. The DYNARE contains several variants of solving DSGE DYNARE contains several variants of solving DSGE models including Scorfheide (2000). This is the process of models including Scorfheide (2000). This is the process of estimation that produced table 5.1. Three sources of estimation that produced table 5.1. Three sources of exogenous perturbations are envisaged in the study:exogenous perturbations are envisaged in the study:
technology shock, monetary shock and external trade technology shock, monetary shock and external trade shock. shock.
Figure 5.1: Priors and PosteriorsFigure 5.1: Priors and Posteriors
0.05 0.1 0.150
200
400
SE_e_a
0.02 0.040
500
1000
1500
SE_e_m
0.02 0.040
100
200
300
SE_e_x
0.3 0.35 0.40
50
alp
0.9860.9880.990.9920.9940.9960.9980
1
2
x 105 bet
0 5 10 15
x 10-3
0
500
gam
0.960.98 1 1.021.041.060
50
mst
0.2 0.4 0.6 0.80
10
rho
0.5 0.6 0.70
20
40psi
0.005 0.01 0.015 0.02 0.025 0.030
200
400
600
800
1000
1200
1400
1600
del
In general, all the parameters estimated are significantly In general, all the parameters estimated are significantly and statistically very different from zero at the level of 5 and statistically very different from zero at the level of 5 percent. In the same sense, the prior mode of the percent. In the same sense, the prior mode of the productivity shock, money supply shocks, and export productivity shock, money supply shocks, and export supply shock, are highly statistically significantly different supply shock, are highly statistically significantly different from zero as could be seen in table 5.2. The table also from zero as could be seen in table 5.2. The table also indicates the posterior mean and the confidence interval. indicates the posterior mean and the confidence interval. These figures can be virtually compared with figure 5.1. These figures can be virtually compared with figure 5.1. Further information on the estimation results are found in Further information on the estimation results are found in table 5.3. In it are contained the prior mean and posterior table 5.3. In it are contained the prior mean and posterior mean, the confidence interval as well as the posterior mean, the confidence interval as well as the posterior deviation. deviation.
Table 5.2: Standard Deviation of ShocksTable 5.2: Standard Deviation of Shocks
Shocks S T A T I S T I CS
Prior Mean
PriorMode
Std. t-stat PriorMean
90%Confidence Interval Prior Pstdev.
Productivity: e_aMoney Supply: e_mExport supply: e_x
0.0350.0090.009
0.03580.00950.0277
0.00000.00000.0000
985.3634616.21601739.2073
0.03620.00930.0233
[0.0349, 0.0375][0.0089, 0.0098][0.0215, 0.0250]
invginvginvg
inf.inf.Inf.
Note: Pstdev. ≡ Posterior deviationinvg. ≡ Inverted Gamminf. ≡ Infinity
According to the estimates of the deep (structural) According to the estimates of the deep (structural) parameters of this model as contained in table 5.3, parameters of this model as contained in table 5.3, output elasticity of capital,, is 0.3457 or 34.5 percent. output elasticity of capital,, is 0.3457 or 34.5 percent. The discount factor,, is 0.9995 or 99.95 percent. This The discount factor,, is 0.9995 or 99.95 percent. This implies an annualized steady-state real interest rate of implies an annualized steady-state real interest rate of about 4 percent. The technology growth rate,, is about 4 percent. The technology growth rate,, is estimated to be 0.0010, that is, 0.1 percent while the estimated to be 0.0010, that is, 0.1 percent while the steady state money growth, mst, is found to be 1.0251 or steady state money growth, mst, is found to be 1.0251 or 102.5 percent. The depreciated rate,, gives an estimated 102.5 percent. The depreciated rate,, gives an estimated value of 0.0031 while consumption-output ratio, , is value of 0.0031 while consumption-output ratio, , is estimated at 0.6405 or 64.05 percent. Finally, the estimated at 0.6405 or 64.05 percent. Finally, the coefficient of autocorrelation, that is, persistence coefficient of autocorrelation, that is, persistence coefficient, , is estimated at 0.1287.coefficient, , is estimated at 0.1287.
Table 5.3: Estimation ResultsTable 5.3: Estimation Results
Parameters S T A T I S T I C
Prior Mean Posterior Mean 90% Confidence Interval
Prior Pstdev.
0.3560.9930.0091.0000.1290.6500.010
0.34570.99950.00101.02510.12870.64050.0031
[0.3359 , 0.3551] [0.9995 , 0.9995] [0.0003 , 0.0017] [0.0032 , 1.0447] [0.0864 , 0.1986] [0.6238, 0.6600] [0.0028 , 0.0035]
betabeta
normalnormal
betabetabeta
0.02000.00200.00300.00700.22300.05000.0050
mst
Note: Pstdev: Posterior deviation
where: : output elasticity of capital; : discount factor; : deterministic trend of technology;
mst: steady state money supply; : persistence (correlation coefficient); : Consumption-output ratio;
: depreciation rate
Given the above estimates, table 5.4 shows the comparisons of Given the above estimates, table 5.4 shows the comparisons of the magnitudes of the estimates of the estimated parameters with the magnitudes of the estimates of the estimated parameters with those of Schorfheide (2000) and Nason and Cogley (1994) (FS those of Schorfheide (2000) and Nason and Cogley (1994) (FS and NC respectively, henceforth). Both studies are based on USA and NC respectively, henceforth). Both studies are based on USA data. From all indications, these estimates appear to be data. From all indications, these estimates appear to be consistent with those of the works cited in this paragraph and consistent with those of the works cited in this paragraph and tend to replicate the Nigerian economy. In effect, the technology tend to replicate the Nigerian economy. In effect, the technology growth rate is estimated at 0.10 per quarter whereas FS and NC growth rate is estimated at 0.10 per quarter whereas FS and NC obtain 0.38 and 0.30 per quarter, respectively. The difference in obtain 0.38 and 0.30 per quarter, respectively. The difference in their results may be due to time factor and the structure of the their results may be due to time factor and the structure of the respective economies. FS study covers 1950:1 to 1997:4 while respective economies. FS study covers 1950:1 to 1997:4 while NC covers 1954:1 to 1991:4. However, the difference between NC covers 1954:1 to 1991:4. However, the difference between the estimate for Nigeria and the USA using both studies explains the estimate for Nigeria and the USA using both studies explains the reality on ground. It clearly shows the difference in the reality on ground. It clearly shows the difference in industrialization propelled by higher technology growth in the industrialization propelled by higher technology growth in the USA, one of the highest per capita income countries, as USA, one of the highest per capita income countries, as evidenced by the gap between the estimates.evidenced by the gap between the estimates.
The consumption-output ratio compares very well in all The consumption-output ratio compares very well in all the studies. In Nigeria, it is about 64 percent while it is the studies. In Nigeria, it is about 64 percent while it is 68.4 percent and 77.3 percent following FS and NC 68.4 percent and 77.3 percent following FS and NC respectively. The high magnitudes estimated in all the respectively. The high magnitudes estimated in all the studies show the importance of consumption in studies show the importance of consumption in explaining business cycle phenomenon in the economies explaining business cycle phenomenon in the economies considered. Consequently, shocks to preferences must considered. Consequently, shocks to preferences must be an important factor for policy analysis in Nigeria as it be an important factor for policy analysis in Nigeria as it is been done in many advanced economies (Smet and is been done in many advanced economies (Smet and Wouters, 2003). Similarly, capital-output ratio is Wouters, 2003). Similarly, capital-output ratio is estimated to be 0.3457; 0.4168 and 0.345 from this estimated to be 0.3457; 0.4168 and 0.345 from this study, FS and NC respectively. It could be seen that the study, FS and NC respectively. It could be seen that the value suggested by NC is very close to the one obtained value suggested by NC is very close to the one obtained in this study. Hence, the ratio has seemingly related in this study. Hence, the ratio has seemingly related implications for both economies. implications for both economies.
Table 5.6: Comparing Estimation ResultsTable 5.6: Comparing Estimation Results
Parameter This Study FS (2000)* NC (1994)**
0.3457 0.4168(0.0218)
0.345
0.9995 0.9901(0.0021)
0.993
0.0010 0.0038(0.0010)
0.003
mst 1.0251 0.0141(0.0017)
1.011
0.1287 0.8623(0.0343)
0.728
0.6405 0.6837(0.04790
0.773
0.0031 0.0020(0.0011)
0.022
where: where: : : output elasticity of capital ; : discount factor; : output elasticity of capital ; : discount factor; : deterministicdeterministic trend of technology; trend of technology; mst mst : steady state money supply; : steady state money supply; : persistence (correlation coefficient) : persistence (correlation coefficient)
: Consumption-output ratio; : depreciation rate: Consumption-output ratio; : depreciation rate
Note: *: Model M in Schorfheide (2000: 659). This corresponds to the standard cash-in advance model. The figures in parenthesis are standard errors **: Nason and Cogley (1994: 567). The cash-in-advance model results.
1
Money growth rate has high value in this study but the Money growth rate has high value in this study but the magnitude is close to that obtained by NC at 1.2051 and magnitude is close to that obtained by NC at 1.2051 and 1.011 respectively. This is an indication of rapid money 1.011 respectively. This is an indication of rapid money supply in the economy. However, the estimated supply in the economy. However, the estimated autocorrelation of money growth is small at 0.1287 in autocorrelation of money growth is small at 0.1287 in case of this study whereas it is very high in the cases of case of this study whereas it is very high in the cases of FS and NC which is 0.8623 and 0.773 respectively. FS and NC which is 0.8623 and 0.773 respectively. Since prices in the model are modeled to adjust quickly a Since prices in the model are modeled to adjust quickly a large is needed to capture the persistence in inflation. large is needed to capture the persistence in inflation. The small value obtained for in this study seems to The small value obtained for in this study seems to contradict this expectation. Hence, the run-away inflation contradict this expectation. Hence, the run-away inflation obtained during most part of the period covered by this obtained during most part of the period covered by this study seems to match the data.study seems to match the data.
The result of the estimation of the discount factor The result of the estimation of the discount factor parameter, , shows that it is very close to unity. The parameter, , shows that it is very close to unity. The parameter, , measures the level of impatience of parameter, , measures the level of impatience of consumers and lenders in the economy. This value, consumers and lenders in the economy. This value, thus, confirms the impatience of the representative thus, confirms the impatience of the representative household in the economy. The result estimated in the household in the economy. The result estimated in the study at about 0.9995 is a little bit higher than those of study at about 0.9995 is a little bit higher than those of FS and NC at 0.99 and 0.993, respectively. That small FS and NC at 0.99 and 0.993, respectively. That small gap in the estimates between this study and those of FS gap in the estimates between this study and those of FS and NC can be inferred to justify consumer behaviors in and NC can be inferred to justify consumer behaviors in both economies. Finally, the depreciation rate, , FS and both economies. Finally, the depreciation rate, , FS and NC are 0.20 and 2.2, respectively while our study shows NC are 0.20 and 2.2, respectively while our study shows 0.31. This is a wide gap between the value obtained in 0.31. This is a wide gap between the value obtained in NC as against those of this study and FS.NC as against those of this study and FS.
In effect, the import of using Bayesian method in In effect, the import of using Bayesian method in estimating/simulating our model becomes estimating/simulating our model becomes evident. As argued by Liu (2006) the process of evident. As argued by Liu (2006) the process of ‘’estimation’’ is not one of deducing the values of ‘’estimation’’ is not one of deducing the values of fixed parameters, but rather one of continually fixed parameters, but rather one of continually updating and sharpening our subjective beliefs updating and sharpening our subjective beliefs about the state of the world around us. In about the state of the world around us. In addition, it has been pointed out that Bayesian addition, it has been pointed out that Bayesian procedure is in terms of probabilistic statements procedure is in terms of probabilistic statements rather than the classical hypothesis testing rather than the classical hypothesis testing procedure.procedure.
6.0 Macroeconomic Policies and 6.0 Macroeconomic Policies and Business Cycles in NigeriaBusiness Cycles in Nigeria
Using the IRFs and the VDs the main objective here is to Using the IRFs and the VDs the main objective here is to examine what happens to the path of the endogenous examine what happens to the path of the endogenous variables when some perturbations occur in the variables when some perturbations occur in the economy. The graphs of the IRFs show the actual economy. The graphs of the IRFs show the actual impulse response functions for each of the endogenous impulse response functions for each of the endogenous variables, given that they actually moved. These can be variables, given that they actually moved. These can be especially useful in visualizing the shape of the transition especially useful in visualizing the shape of the transition functions and the extent to which each variable is functions and the extent to which each variable is affected (Griffoli, 2007:34). affected (Griffoli, 2007:34).
Productivity and Business Cycles in Productivity and Business Cycles in NigeriaNigeria
Figures 6.1 plots the impulse responses to the various Figures 6.1 plots the impulse responses to the various structural shocks considered in this study. A positive structural shocks considered in this study. A positive productivity shock caused consumption to increase over productivity shock caused consumption to increase over time. On impact the effect was negative but gradually time. On impact the effect was negative but gradually became asymptotic to the steady state over the time became asymptotic to the steady state over the time horizon. The stock of capital, k; interest rate, R; export, horizon. The stock of capital, k; interest rate, R; export, x; and output Y, also behave in a similar manner. In x; and output Y, also behave in a similar manner. In contrast, price level, P; deposit, d; loans to firms, l; contrast, price level, P; deposit, d; loans to firms, l; labour force, n; and wages, w, depict an inverse labour force, n; and wages, w, depict an inverse relationship indicating that a positive productivity shock relationship indicating that a positive productivity shock at impact causes these variables to fall and then at impact causes these variables to fall and then converge non-linearly to the steady state as time goes converge non-linearly to the steady state as time goes on in the horizon.on in the horizon.
FIGURE 6.1: Orthogonalized shock to e_aFIGURE 6.1: Orthogonalized shock to e_a
20 40 60-4
-2
0x 10
-3 c
20 40 600
2
4
6x 10
-3 d
20 40 600
0.005
0.01
0.015dA
20 40 600
0.01
0.02e
20 40 60-0.01
-0.005
0gp_obs
20 40 600
0.01
0.02gx_obs
20 40 600
0.01
0.02gy_obs
20 40 60-0.1
-0.05
0k
20 40 600
0.005
0.01l
where: c: Consumption; d: deposits; dA : stochastic process; e: exogenous stochastic process; gp_obs :
observed price; gx_obs: observed export; gy_obs: observed output; k: capital stock; l: loans; m: money
supply; n: labour supply; P: Price level; R: interest rate; w: Wage Rate; x: Export; y: Output.
20 40 600
0.5
1x 10
-3 n
20 40 600
0.01
0.02P
20 40 60-0.015
-0.01
-0.005
0P_obs
20 40 60
-4
-2
0x 10
-3 R
20 40 600
0.005
0.01W
20 40 60-2
-1
0x 10
-3 x
20 40 600
0.05
0.1X_obs
20 40 60-1
-0.5
0x 10
-3 y
20 40 600
0.01
0.02Y_obs
From theses observations, it follows that relationships From theses observations, it follows that relationships between productivity and some macro-economic variables between productivity and some macro-economic variables do not follow standard patterns. In effect, a positive do not follow standard patterns. In effect, a positive productivity shock is expected to cause rise in output as productivity shock is expected to cause rise in output as indicated above and a concomitant increase in labour indicated above and a concomitant increase in labour supply, increase in wages and even fall in prices. A possible supply, increase in wages and even fall in prices. A possible explanation in these discrepancies could be found in the explanation in these discrepancies could be found in the sources of productivity. If it is due to technology growth, sources of productivity. If it is due to technology growth, there is the likelihood that such changes will not cause there is the likelihood that such changes will not cause increase in labour supply and wage increases. However, all increase in labour supply and wage increases. However, all these variables converge to the steady state in the long run. these variables converge to the steady state in the long run. From a policy prescription perspective, the results suggest From a policy prescription perspective, the results suggest that policy in form of productivity shock must be backed-up that policy in form of productivity shock must be backed-up by complementary policies in order to bring about the by complementary policies in order to bring about the desired fall in unemployment, increase in wages and price desired fall in unemployment, increase in wages and price stability. stability.
Table 6.1 corroborates the findings described above. Table 6.1 corroborates the findings described above. The table is policy and transition functions of the DSGE The table is policy and transition functions of the DSGE model. The approximate solution of the model takes the model. The approximate solution of the model takes the form of a set of decision rules or transition equations. form of a set of decision rules or transition equations. The table depicts the interaction between some pre-The table depicts the interaction between some pre-determined variables, that is previous state of the model determined variables, that is previous state of the model and the exogenous shocks observed at the beginning of and the exogenous shocks observed at the beginning of the period on the rows and the endogenous variables on the period on the rows and the endogenous variables on the columns. In the presence of a positive productivity the columns. In the presence of a positive productivity shock, the table shows that the decision coefficients are shock, the table shows that the decision coefficients are positive for all the endogenous variables except stock of positive for all the endogenous variables except stock of capital, export, output, and consumption which are capital, export, output, and consumption which are negative while money is zero. The zero entries are negative while money is zero. The zero entries are indications of no relationship between the variables indications of no relationship between the variables concerned. concerned.
A close examination of some real variables in the model A close examination of some real variables in the model takes us a step further in our analysis. In particular, takes us a step further in our analysis. In particular, observing the output, y, the previous state of capital observing the output, y, the previous state of capital stock, (k(-1)) has a positive effect while predetermined stock, (k(-1)) has a positive effect while predetermined money supply, the productivity shock and money supply money supply, the productivity shock and money supply growth shock have negative effect. Similarly, previous growth shock have negative effect. Similarly, previous state of capital stock has a positive effect on state of capital stock has a positive effect on consumption while predetermined money supply, consumption while predetermined money supply, productivity shock and money supply growth shock all productivity shock and money supply growth shock all have negative coefficient. The policy implication here is have negative coefficient. The policy implication here is that the authorities should be weary of the adverse effect that the authorities should be weary of the adverse effect of technology growth shocks on the welfare of of technology growth shocks on the welfare of households. And a lagged value of money supply has households. And a lagged value of money supply has negative effect on output, export, consumption and negative effect on output, export, consumption and labour force. However, the labour force. However, the
same pre-determined variable has a positive effect on same pre-determined variable has a positive effect on prices, capital, wages, interest rate and loans from prices, capital, wages, interest rate and loans from financial institutions. These results seem to reflect the financial institutions. These results seem to reflect the Nigerian economy.Nigerian economy.
Table 6.2: Policy and Transition FunctionsTable 6.2: Policy and Transition FunctionsEndogenous Variable
d dA gp-obs
gx-obs
gy-obs
l R w K P_obs
X x_obs
y y_obs
m p c e n
Constant
.8494
1.003
1.0079
1.0003
2.4303
.8604
1.0212 1.7616
5.8012
1.0000
1.0000
4.5959
1.0000
1.0110
2.2582
0.4477
1.0000
1.0000
0.1872
k(-1) -0.0628
0 -0.0908
0.0125
0.0172
-.0628
.0586 -0.0627
0.9466
-0.0908
0.0124
0.0573
0.0099
0.0172
0 -0.2035
0.0404
0 -0.0111
P_obs(-1)
0 0 0 0 0 0 0 0 0 1.0000
0 0 0 0 0 0 0 0 0
x(-1) 0 0 0 -1.003
0
0 0 0 0 0 0 0 -4.6097
0 0 0 0 0 0 0
x-obs(-1)
0 0 0 0 0 0 0 0 0 0 0 1.0000
0 0 0 0 0 0 0
y(-1) 0 0 0 0 -1.7270
0 0 0 0 0 0 0 0 -1.7270
0 0 0 0 0
y-obs(-1)
0 0 0 0 0 0 0 0 0 0 0 0 0 1.0000
0 0 0 0 0
m(-1) -0.2066
0 2.1289
-0.047
1
-0.0649
0.4934
1.5812 3.0797
0.1551
2.1288
-0.0469
-0.0216
-0.0376
0.0649
0.7000
2.5356
-0.1927
0 -0.0181
P(-1) 0 0 -0.4463
0 0 0 0 0 0 -.4463
0 0 0 0 0 0 0 0 0
e_a 0.3643
1.003
-0.4809
0.9307
0.9033
0.3643
0.3389 0.3643
-5.4916
-.4809
-0.0720
4.2774
-0.0577
0.9032
0 1.1806
-0.2341
1.0000
0.0644
e_m -0.2983
0 1.6347
-0.068
0
-0.0938
0.7126
2.2837 4.4480
0.2240
1.6343
-0.0678
-0.3125
-0.0543
0.0938
1.0110
3.6622
-0.2784
0 -0.0261
e_x 0 0 0 1.003005
0 0 0 0 0 0 1.0000
4.6097
0 0 0 0 0 0 0
6.3 Monetary Policies and Business 6.3 Monetary Policies and Business
CyclesCycles Going also by Figures 6.2, a positive money supply Going also by Figures 6.2, a positive money supply
shock on consumption; interest rate, R; total export, x; shock on consumption; interest rate, R; total export, x; and output y has the same effect similar to those of a and output y has the same effect similar to those of a positive productivity shock. In the same vein, bank positive productivity shock. In the same vein, bank deposit d, and labour force, n also shows similar deposit d, and labour force, n also shows similar response. However, a positive money supply increases response. However, a positive money supply increases from 1 at impact to a peak around the 8th quarter only to from 1 at impact to a peak around the 8th quarter only to decrease monotonically into the horizon. Similarly, R, x decrease monotonically into the horizon. Similarly, R, x and y indicate similar effect since they all rose from a and y indicate similar effect since they all rose from a negative position at impact only to converge around the negative position at impact only to converge around the steady state. The variable price level (P) and loan (l) steady state. The variable price level (P) and loan (l) present a different visual observation. They both decline present a different visual observation. They both decline right from the impact of the money shock and decrease right from the impact of the money shock and decrease monotonically coinciding with the steady state into the monotonically coinciding with the steady state into the horizon. horizon.
The above discussion is reinforced by examining the The above discussion is reinforced by examining the effects of monetary policy shocks; a positive monetary effects of monetary policy shocks; a positive monetary policy shock leads to a rise in nominal interest rate. This policy shock leads to a rise in nominal interest rate. This causes an increase in nominal wage rate since price causes an increase in nominal wage rate since price level has also increased nominally. Contrary to stylized level has also increased nominally. Contrary to stylized facts, following a monetary policy shock, expansive facts, following a monetary policy shock, expansive monetary policy, real wages are expected to fall in the monetary policy, real wages are expected to fall in the face of rising inflation. In this case, price level increases face of rising inflation. In this case, price level increases at the same rate so that the wage rate remains nominally at the same rate so that the wage rate remains nominally high. This will discourage export supply, output high. This will discourage export supply, output production, consumption, bank deposits and labour force production, consumption, bank deposits and labour force since the demand for labour falls following the fall in since the demand for labour falls following the fall in demand for goods and fall in production as a demand for goods and fall in production as a consequence. This assertion is drawn from table 6.2. consequence. This assertion is drawn from table 6.2. This result also corroborates the monetarist predictions This result also corroborates the monetarist predictions to the extent that real variables do not affect nominal to the extent that real variables do not affect nominal variables. In this case, in particular, the future path of variables. In this case, in particular, the future path of money supply is affected by previous state of money money supply is affected by previous state of money supply and the current monetary supply growth shock. supply and the current monetary supply growth shock.
FIGURE 6.2: Orthogonalized Shock to e_mFIGURE 6.2: Orthogonalized Shock to e_m
20 40 60-2
-1
0
1x 10
-3 c
20 40 60-1.5
-1
-0.5
0x 10
-3 d
20 40 600
0.005
0.01gp_obs
20 40 60-5
0
5x 10
-4 gx_obs
20 40 60-5
0
5x 10
-4 gy_obs
20 40 600
2
4x 10
-3 k
20 40 60-5
0
5x 10
-3 l
20 40 600
0.005
0.01m
20 40 60-2
-1
0x 10
-4 n
20 40 60-0.01
0
0.01
0.02P
20 40 600
0.01
0.02P_obs
20 40 60-0.02
-0.01
0
0.01R
20 40 60-0.05
0
0.05W
20 40 60-5
0
5x 10
-4 x
20 40 60-2
0
2x 10
-3 X_obs
20 40 60-5
0
5x 10
-4 y
20 40 60-5
0
5x 10
-4 Y_obs
6.4 Export Policies and Business Cycles 6.4 Export Policies and Business Cycles in Nigeriain Nigeria
This study suggests there are many potential This study suggests there are many potential determinants of business cycles in Nigeria. And without determinants of business cycles in Nigeria. And without doubt a leading candidate is export. In term of business doubt a leading candidate is export. In term of business cycle analysis, higher trade between one or more cycle analysis, higher trade between one or more countries means more co-movement of business cycles. countries means more co-movement of business cycles. From figure 6.3, the export supply shock seems to have From figure 6.3, the export supply shock seems to have more impact on export variables namely the observable more impact on export variables namely the observable X, the log-linearized variable x and the growth rate of the X, the log-linearized variable x and the growth rate of the observable gx_obs, although the impact is of short observable gx_obs, although the impact is of short duration. In effect, a positive export supply shock led to a duration. In effect, a positive export supply shock led to a sharp fall in export and reached the steady state value sharp fall in export and reached the steady state value within the first quarter. In particular, the fall in the case of within the first quarter. In particular, the fall in the case of gx_obs variable fell below the steady state only to return gx_obs variable fell below the steady state only to return to it within the second quarter. This result seemingly to it within the second quarter. This result seemingly suggests little or no relationship between export shocks suggests little or no relationship between export shocks and the other endogenous variables in the model. and the other endogenous variables in the model.
These results suggest and amplified the ‘’marginalization’’ These results suggest and amplified the ‘’marginalization’’ of the Nigerian economy in the world trade. This of the Nigerian economy in the world trade. This maginalization of the economy is due to lagging growth in maginalization of the economy is due to lagging growth in GDP and not due to low trade ratios ( Nigeria Congress, GDP and not due to low trade ratios ( Nigeria Congress, undated: 26). Another issue is the fact that the economy undated: 26). Another issue is the fact that the economy is monocultural depending for most of its earnings from is monocultural depending for most of its earnings from the export of crude oil. Consequently, the export sector the export of crude oil. Consequently, the export sector both oil and non-oil export are not linked to the economy both oil and non-oil export are not linked to the economy and hence no much value addition. Though our model do and hence no much value addition. Though our model do not explicitly incorporate the import sector, Nigeria is not explicitly incorporate the import sector, Nigeria is excessively dependent on the international economy and excessively dependent on the international economy and she is thus exposed to international shocks and the she is thus exposed to international shocks and the boom-burst cycles of the world macro- economy are not boom-burst cycles of the world macro- economy are not strange to her. However, the incorporation of the import strange to her. However, the incorporation of the import sector could amplify the transmission of international sector could amplify the transmission of international business cycles into the Nigerian economy.business cycles into the Nigerian economy.
In terms of policy prescriptions, and as indicated by the In terms of policy prescriptions, and as indicated by the decision variables of table 6.1, a set of policy mix is decision variables of table 6.1, a set of policy mix is required to safeguard the economy from external required to safeguard the economy from external vagaries. According to Nigeria Congress (Undated:13), vagaries. According to Nigeria Congress (Undated:13), the boom-and–burst cycles that accompany commodity the boom-and–burst cycles that accompany commodity exports are one of the consequences of monoculturalism exports are one of the consequences of monoculturalism and structural vulnerability and impact adversely on the and structural vulnerability and impact adversely on the sustainable provision of essential public infrastructure. sustainable provision of essential public infrastructure. The non correlation between the export supply shock The non correlation between the export supply shock and the other endogenous variables may not be and the other endogenous variables may not be unconnected with the restrictions placed on our model. unconnected with the restrictions placed on our model. In effect, the latter does not explicitly incorporate In effect, the latter does not explicitly incorporate exchange rate, foreign direct investments, and other exchange rate, foreign direct investments, and other external trade variables. It is not impossible that a model external trade variables. It is not impossible that a model that incorporates all these external sector variables may that incorporates all these external sector variables may adequately capture the structural behavior of the adequately capture the structural behavior of the Nigerian economy.Nigerian economy.
Figure 6.3: Orthogonalized Shock to e_xFigure 6.3: Orthogonalized Shock to e_x
10 20 30 40 50 60 70-0.02
0
0.02gx_obs
10 20 30 40 50 60 700
0.01
0.02x
10 20 30 40 50 60 70-0.1
0
0.1X_obs
The contributions of each structural shock on all the The contributions of each structural shock on all the endogenous variables can also be appreciated using the endogenous variables can also be appreciated using the variance decomposition technique. The variance variance decomposition technique. The variance decomposition shows the percentage of error variance in decomposition shows the percentage of error variance in one variable due to one standard deviation shock of the one variable due to one standard deviation shock of the variable itself and other variables in the system. The variable itself and other variables in the system. The variance decomposition decomposes variations in an variance decomposition decomposes variations in an endogenous variable into the component shocks to the endogenous variable into the component shocks to the endogenous variables in the system. The results of endogenous variables in the system. The results of variance decomposition help in ascertaining the relative variance decomposition help in ascertaining the relative importance of the various variables in explaining the importance of the various variables in explaining the variations in the variable being considered in other words variations in the variable being considered in other words the computation of variance decomposition assist in the computation of variance decomposition assist in gauging the importance of individual shocks. gauging the importance of individual shocks.
From table 6.1, it could be observed that export supply shock From table 6.1, it could be observed that export supply shock does not add to the explanation of the variations in many of the does not add to the explanation of the variations in many of the variables. In general, productivity shock explains much of the variables. In general, productivity shock explains much of the variations in consumption, deposit, growth in productivity, capital variations in consumption, deposit, growth in productivity, capital stock, loans, labour demand, Price level and total output. The stock, loans, labour demand, Price level and total output. The monetary supply shock explains much of the variation in price monetary supply shock explains much of the variation in price growth, gp_obs; in interest rate, R, in wage rate, w, and totality of growth, gp_obs; in interest rate, R, in wage rate, w, and totality of money supply variable itself. However, export supply shock money supply variable itself. However, export supply shock explains 92.3 percent of total variation in total export while explains 92.3 percent of total variation in total export while productivity and money supply shocks only explain 7.5 percent productivity and money supply shocks only explain 7.5 percent and 0.2 percent respectively.It is also shown that export is and 0.2 percent respectively.It is also shown that export is weakly correlated with all the endogenous variables of the model weakly correlated with all the endogenous variables of the model and with a negative direction in the cases of deposits, d, loans, l, and with a negative direction in the cases of deposits, d, loans, l, labour supply, n, price level, P, and average wage. In terms of labour supply, n, price level, P, and average wage. In terms of policy prescriptions the above observation exposes the weak policy prescriptions the above observation exposes the weak linkages between the export sector and the rest of the economy linkages between the export sector and the rest of the economy and thus reinforces the need for a more proactive policy that and thus reinforces the need for a more proactive policy that engenders value addition in the sector.engenders value addition in the sector.
The above The above resultresult seems to confirm the age old classical doctrine seems to confirm the age old classical doctrine stipulating that nominal changes will have effect on nominal stipulating that nominal changes will have effect on nominal variables while real changes will have implications on real variables while real changes will have implications on real variables. This study thus shows that business cycles in Nigeria variables. This study thus shows that business cycles in Nigeria have been propagated by real as well as nominal shocks. have been propagated by real as well as nominal shocks.
7.0 Conclusions7.0 ConclusionsFindingsFindings
There are two set of results from this study: the atheoretical There are two set of results from this study: the atheoretical and theoretical according to the method used. Given the and theoretical according to the method used. Given the former approach, it is found that business cycle fluctuations former approach, it is found that business cycle fluctuations exist in Nigeria and the observed stylized facts are exist in Nigeria and the observed stylized facts are comparable to those recorded in the advanced economies. comparable to those recorded in the advanced economies. The results obtained from the theory-based approach, that is, The results obtained from the theory-based approach, that is, DSGE-VAR show that productivity shock, money supply DSGE-VAR show that productivity shock, money supply growth shock and export supply growth shock contributed in growth shock and export supply growth shock contributed in the statistical sense in explaining that business cycle is driven the statistical sense in explaining that business cycle is driven by both real and nominal shocks. A policy consequence of by both real and nominal shocks. A policy consequence of this is the unprecedented growth rate of money supply into this is the unprecedented growth rate of money supply into the economy which confirms theoretical underpinnings in the the economy which confirms theoretical underpinnings in the sense that price increases, engendered by high money supply sense that price increases, engendered by high money supply into the economy, have manifested in high nominal wage and into the economy, have manifested in high nominal wage and interest rate over most part of the period under study.interest rate over most part of the period under study.
The magnitudes of the parameter estimates are reinforced by The magnitudes of the parameter estimates are reinforced by the results of similar studies for which the same methodology the results of similar studies for which the same methodology (DSGE) and the same variant (cash-in-balance) have been (DSGE) and the same variant (cash-in-balance) have been used (Nason and Cogley, 1994 and Scorfheide, 2000).used (Nason and Cogley, 1994 and Scorfheide, 2000).
RecommendationsRecommendations
This studyThis study has shown that business cycles do exist in has shown that business cycles do exist in the Nigerian economy and has demonstrated the co-the Nigerian economy and has demonstrated the co-movements between the gross domestic product and its movements between the gross domestic product and its main components. Consequent upon the findings of the main components. Consequent upon the findings of the study, one of the recommendations that could be made study, one of the recommendations that could be made is that documenting business cycle analysis, dating and is that documenting business cycle analysis, dating and turning points, as well as analysis of the periods of turning points, as well as analysis of the periods of booms and bursts should become major research efforts booms and bursts should become major research efforts in the immediate future in the economy. Such studies will in the immediate future in the economy. Such studies will assist policy makers to take appropriate policy measures assist policy makers to take appropriate policy measures given the available information on the position of the given the available information on the position of the economy at any given time. economy at any given time.
The results obtained from this study (though tentative) The results obtained from this study (though tentative) are indications that micro-founded, theoretically are indications that micro-founded, theoretically consistent and stochastic optimization models are consistent and stochastic optimization models are germane to macroeconomics analysis of Nigeria. The germane to macroeconomics analysis of Nigeria. The fact that the method used in the study facilitates fact that the method used in the study facilitates feedbacks between the professional economists and feedbacks between the professional economists and decision-makers promises an alternative policy analysis decision-makers promises an alternative policy analysis tool in the Nigerian economy. The study has been able tool in the Nigerian economy. The study has been able to explain productivity changes, replicates nominal side to explain productivity changes, replicates nominal side dynamics as well as transmission mechanism of terms of dynamics as well as transmission mechanism of terms of trade; it follows that the study’s approach could become trade; it follows that the study’s approach could become a candidate model for understanding the Nigerian a candidate model for understanding the Nigerian economy. Finally, a major finding of the study is the fact economy. Finally, a major finding of the study is the fact that the export sector which is supposed to be the that the export sector which is supposed to be the engine of growth of the economy is exhibiting weak engine of growth of the economy is exhibiting weak linkages with the rest of the economy. This we belief is a linkages with the rest of the economy. This we belief is a major challenge of policy. major challenge of policy.
Concluding RemarksConcluding Remarks
In spite of the initial suspicion that business cycles do In spite of the initial suspicion that business cycles do not exist in the Nigerian economy, this study has shown not exist in the Nigerian economy, this study has shown that they occur and quite at irregular intervals as that they occur and quite at irregular intervals as predicted in the literature. The study also shows the predicted in the literature. The study also shows the degree of pro-cyclicality or counter-cyclicality between degree of pro-cyclicality or counter-cyclicality between the gross domestic product and a number of its main the gross domestic product and a number of its main components. These are also within the theoretical components. These are also within the theoretical expectations. The application of a DSGE model helps in expectations. The application of a DSGE model helps in affirming the fact that the Nigerian economy is buffeted affirming the fact that the Nigerian economy is buffeted by various shocks: productivity, money supply and terms by various shocks: productivity, money supply and terms of trade, in the case of this study. Above all, the study of trade, in the case of this study. Above all, the study shows that DSGE models can be applied for policy shows that DSGE models can be applied for policy analysis in Nigeria. In particular they could be used for analysis in Nigeria. In particular they could be used for monetary policy analysis and prescriptions as well as monetary policy analysis and prescriptions as well as designing value addition export policies. It could also be designing value addition export policies. It could also be used to understand some phenomena that may be used to understand some phenomena that may be influencing the course of the economy such as the influencing the course of the economy such as the Dutch-Disease syndrome. Dutch-Disease syndrome.
Limitations and Future Lines of ResearchLimitations and Future Lines of Research
DSGE models are better taken to quarterly data. DSGE models are better taken to quarterly data. However, these are in short supply in Nigeria. It was However, these are in short supply in Nigeria. It was therefore necessary to use statistical technique of data therefore necessary to use statistical technique of data generation using the Galdafo formula to render the generation using the Galdafo formula to render the annual data in quarterly form. Further, the Bayesian annual data in quarterly form. Further, the Bayesian method used in the study required choice of priors that method used in the study required choice of priors that reflected the model economy. In this respect it is reflected the model economy. In this respect it is necessary to work with results on micro-level studies to necessary to work with results on micro-level studies to provide the prior information. In view of few researches in provide the prior information. In view of few researches in this area in Nigeria it was difficult to get this information. this area in Nigeria it was difficult to get this information. The study thus assumes some priors from other The study thus assumes some priors from other countries outside Africa with different experiences of countries outside Africa with different experiences of business cycles. This approach is not uncommon to business cycles. This approach is not uncommon to similar studies (See Bergoing and Soto, 2002) and similar studies (See Bergoing and Soto, 2002) and (Weltz, 2005), on Argentina and Sweedish economies, (Weltz, 2005), on Argentina and Sweedish economies, respectively. respectively.
Finally, there are few studies in this area in Nigeria and Finally, there are few studies in this area in Nigeria and indeed Africa South of the Sahara except South Africa. indeed Africa South of the Sahara except South Africa. In fact this study could only get two papers by Olekah In fact this study could only get two papers by Olekah and Oyaromade (2007) and Peiris and Saxegaard and Oyaromade (2007) and Peiris and Saxegaard (2007). In view of these observations the results of the (2007). In view of these observations the results of the study can be described as tentative. However, the study study can be described as tentative. However, the study can be explored in a number of directions. Some of the can be explored in a number of directions. Some of the areas for future research works include the following: areas for future research works include the following:
• The model used in this study is based on Cash-In-The model used in this study is based on Cash-In-Advance, CIA, assumption. Other assumptions such as Advance, CIA, assumption. Other assumptions such as Lucas-Fuerst Model, LF; The Portfolio Cost of Lucas-Fuerst Model, LF; The Portfolio Cost of Adjustment Model, noted as CEP with due respect to Adjustment Model, noted as CEP with due respect to Christiano and Eichenaum; and The Imperfect Labour Christiano and Eichenaum; and The Imperfect Labour Substitutes Model, abbreviated as CEL in recognition of Substitutes Model, abbreviated as CEL in recognition of the same authors could be tested on the Nigerian data the same authors could be tested on the Nigerian data (see Nason and Cogley, 1994);(see Nason and Cogley, 1994);
• The study did not feature sensitivity analysis and The study did not feature sensitivity analysis and forecast. This was due to the limited technical knowledge forecast. This was due to the limited technical knowledge of the researcher. In the nearest future, it is hoped that of the researcher. In the nearest future, it is hoped that the present model will be re-estimated and forecast the present model will be re-estimated and forecast carried out;carried out;
• This study can be extended to analyze monetary This study can be extended to analyze monetary policies of the Central Bank of Nigeria and in particular policies of the Central Bank of Nigeria and in particular test the Taylor rule and the New Keynesian Phillips test the Taylor rule and the New Keynesian Phillips curve; curve;
• This study concentrated on the effects of monetary This study concentrated on the effects of monetary policy and the Dutch disease on the macro economy. It policy and the Dutch disease on the macro economy. It will be germane to incorporate fiscal policies in future will be germane to incorporate fiscal policies in future works;works;
• A dynamic stochastic model such as the one used in this A dynamic stochastic model such as the one used in this study could be used to investigate financial development study could be used to investigate financial development and economic growth in Nigeria;and economic growth in Nigeria;
• One of the assumptions of the model in this study is that One of the assumptions of the model in this study is that of close economy in the sense that the optimizing of close economy in the sense that the optimizing behavior of importers, and the rest of the world were not behavior of importers, and the rest of the world were not explicitly taken into consideration. This study can explicitly taken into consideration. This study can therefore be extended to incorporate the assumptions of therefore be extended to incorporate the assumptions of Small Open Economy;Small Open Economy;
• The study can be used to examine the transmission The study can be used to examine the transmission mechanism of international business cycles and mechanism of international business cycles and fluctuations into an emerging economy like Nigeria;fluctuations into an emerging economy like Nigeria;
• It can also provide a platform for the study of business It can also provide a platform for the study of business cycles and macroeconomic policy among the economies cycles and macroeconomic policy among the economies of countries within a union such as the ECOWAS; andof countries within a union such as the ECOWAS; and
• This study has established the existence of business This study has established the existence of business cycles in Nigeria. It is thus apposite to envisage research cycles in Nigeria. It is thus apposite to envisage research works in the area of cycle dating and possible turning works in the area of cycle dating and possible turning points. points.
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