chapter five

Openness and the Effects of Fiscal and Monetary Policies on Real Output in Nigeria (1960-2003)

By

Olufemi Muibi SAIBU B.Sc (Ed), M.Sc. Economics (Ile-Ife)

Being a Research Thesis submitted to the Department of Economics, Faculty of Social Sciences

In partial fulfillment of the condition of award of The Degree of Doctor of Philosophy in Economics of Obafemi Awolowo University, Ile-Ife, Nigeria.

2006

1

CERTIFICATION This research study by SAIBU Muibi Olufemi has been read and approved in fulfillment of requirement for the award of Doctor of Philosophy Degree in Economics in the Department of Economics, Obafemi Awolowo University, Ile-Ife Nigeria.

____________________

____________________

Professor S.I. Oladeji,

Professor A. E. Akinlo

Supervisor

Head, Department of Economics

2

AUTHORIZATION

OBAFEMI AWOLOWO UNIVERSITY, ILE-IFE, NIGERIA. HEZEKIAH OLUWASANMI LIBRARY Postgraduate Thesis Authorization to Copy

AUTHOR: TITLE:

SAIBU, Muibi Olufemi

Openness and The Effects of Monetary and Fiscal Policies on Real Outputs in Nigeria, (1960-2003)

DEGREE: Ph.D YEAR: 2006 I, SAIBU Muibi Olufemi hereby authorize the Hezekiah Oluwasanmi Library, Obafemi Awolowo University, Ile-Ife, Nigeria to copy my thesis in whole or part, in response to requests from individual research or organisation for the purpose of non-commercial study or research.

3

DEDICATION This research work is dedicated to Almighty God and all who made this task a success

4

ACKNOWLEDGEMENT Oars alone never prevail to reach the distance coast; the breath of heaven must swell the sail. I praise and glorify the name of almighty God that has enabled His humble servant complete this research work. I am profoundly grateful and appreciative to my supervisor, Professor S.I Oladeji, for his intellectual guidance, mentoring, and for his thorough supervision. I thank him also for his continuous assurance and confidence in my capacity to do it even when I have little faith. I am equally grateful to Professor J.A Fabayo, former Dean of the Faculty of Social Sciences for his munificent posture and support towards my career always. His conviction and confidence in my ability has always made me to do more than what I believe I could do. My deep sense of regards and gratitude also go to the Head of Department, Professor A.E Akinlo, for his encouragement and motivation My sincere appreciation goes to all the staff in the Department both academic and non-academic. Most especially Professor (Mrs.) Soetan, Dr (Mrs.) Olusi, Dr. Olomola, Dr Adebayo, Dr. Abiola, Dr. Akinbobola, Dr Yinusa, Dr Folorunso, Mr. Ayeigbusi, Mr. Ajisafe, Mr. Ajilore, Mr. Olagunju and Mr. Adejumo, more importantly my buddy, Mr. Adedokun for their moral support and encouragement. My appreciation will not be complete without mentioning Professor Olaloye (retired) and Dr. Seth Akutson for their counsel and support. My appreciation also goes to Mr. Ibitara, Mr. Oyelakin, Mrs. Dada, Mr.Fasanmi, Mr. Osifeso and Mr. Oyerinde for providing all the administrative supports and assistance always. I do thank the African Economic Research Consortium (AERC), Nairobi, for providing the financial assistance towards the completion of this project

5

I shall always remain grateful to all members of my family who stood solidly with me during the hard times. Finally, I remain grateful to my wife Mrs. Bolanle Basirat Saibu (Nee Olagunju) who cheerfully encouraged me and provide all the home support and to my daughters Azizah and Abibah, as well as Alimah, and Amidah. and my son who came Abibulahi who joined team later whose arrivals during these periods served as morale boost to my intellectual vigor. To you all, no amount of words can vividly convey my appreciation; God will also see you through in all your endeavours. Amen.

6

TABLE OF CONTENT

Page

CHAPTER ONE: INTRODUCTION 1.1

Background to the study

1

1.2

Statement of the Research Problem

3

1.2.1 Key Research Questions

7

1.3

Objectives of the study

7

1.4

Justification of the study

8

1.5

Scope of the study

12

1.6

Plan of the Study

13

CHAPTER TWO:

REVIEW OF LITERATURE

2.1

Introduction

15

2.2

Theoretical Perspectives

15

2.2.1 New Classical Economics and Policy Effectiveness

16

2.2.2 New Keynesian Economics and Effectiveness of Policy

23

2.2.3 Synopsis of the theoretical Paradigms

31

2.3

33

Review of Empirical Studies

2.3.1 Empirical studies from the Industrialized Economies

34

2.3.2 Empirical studies from the Less Industrialized Economies

42

2.3.2

Empirical studies from the Nigerian Economy

56

2.4

Concluding Remarks

65

CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Theoretical Framework

67

3.1.1 Rational expectation theory

71

3.1.2 New classical Aggregate Supply curve

74

3.1.3 Policy Ineffectiveness Theory

78

3.1.4 Openness and Effectiveness of Policy

81

3.2

Model Specification

83

3.3

Analytical Techniques

92

7

3.4

Modeling Anticipated and Unanticipated Policy Shocks

99

3.5

Modeling Asymmetric effects of Fiscal and Monetary policy shocks

103

3.6

Measurement of Variables and sources of Data

105

CHAPTER FOUR: OUTPUT FLUCTUATIONS AND MACROECONOMIC POLICY IN NIGERIA (1960-2003) 4.1 Introduction

109

4.2.1 Real Output Growth and Fluctuations in Nigeria

109

4.2.2 A Disaggregate Analysis of Output Fluctuations in Nigeria

115

4.3

123

Monetary Policy Regimes In Nigeria, 1960-2003

4.3.1 Monetary policy Regimes and Real Output fluctuations in Nigeria

128

4.4

Fiscal Policy Regimes in Nigeria 1960-2003

134

4.4.1

Fiscal policy regimes and real output Fluctuations in Nigeria

138

4.5

Relationship between Policy and Real output in Nigeria.

146

CHAPTER FIVE: 5.1

EMPIRICAL VERIFICATION OF POLICY INEFFECTIVENESS PROPOSITION IN NIGERIA

Introduction

149

5.2.1 Measurement of Anticipated and Unanticipated Policy Shocks

149

5.2.2 Estimation of Unanticipated Policy shocks

154

5.3.1 Time series Properties of the Data

155

5.3.2 Cointegration Test

157

5.4

The Real Effects of Anticipated and Unanticipated Policy Shocks

159

5.5

The Real Effects of Asymmetric Policy Shocks

169

CHAPTER SIX:

REAL OUTPUT DYNAMIC RESPONSE TO POLICY AND OPENNESS SHOCKS 6.1 Introduction 175 6.2 Impulse Response Functions Analysis 176 6.2.1 Timing and Sizes of Real Output responses to Policy Impulses 183 6.3 Variance Decomposition of Real Output Growth Fluctuations 186

CHAPTER SEVEN: SUMMARY, CONCLUSION AND POLICY IMPLICATIONS 7.1 Introduction

8

193

7.2 7.3 7.4 7.5

Summary of Findings Conclusion Policy Implications Limitations of the Study and Area of Future Research

194 196 197 199

REFERENCES

201

APPENDIX ENDNOTES

220 231

9

ABSTRACT The study examined the effects of monetary and fiscal policies on the real output growth in the small open Nigerian economy. Specifically, it verified the implication of increasing economic openness on the efficacy of monetary and fiscal policy and also established whether fiscal and monetary policies had symmetrical effects on real output in Nigeria. This was with a view to establishing the validity of macroeconomic policy ineffectiveness proposition of new classical school in Nigeria. The study used annual secondary time series data from 1960 to 2003 on Nigeria, collected from International Financial Statistics (IFS) Yearbook published by International Monetary Fund (IMF), 1990 and 2003 editions. A modified Generalized Autoregressive Consistent Heteroskedastic (GARCH) model and Vector Error Correction Mechanism (VECM) technique were used to generate the anticipated and unanticipated series used for estimating an open economy version of the new classical macroeconomic model. Two measures of fiscal and monetary shocks were combined with openness and real oil price shocks in a VECM model to assess the effects of anticipated and unanticipated policy shocks on the output equations and to draw policy inferences

10

The empirical results showed that anticipated and unanticipated fiscal and monetary shocks had no significant positive effects on real output. Furthermore, the degree of openness and oil price shocks {with coefficients 0.434 (t-value –2.08,< 0.05) and -0.684 (t-value -2.11,