The Effectiveness of Fiscal and Monetary Policy Shocks on External Balance in Nigeria, 1981-2019

Abstract

The study sought to take an objective view into investigating the effects of fiscal and on external balance in Nigeria, within a period of 39 years, 1981 – 2019. The study adopted the Vector Autoregressive (VAR) model to estimate the short run impact, and the Vector Error Correction Model (VECM) to analyse the short run dynamic effect and long run impact on trade balance, after establishing a cointegrating relationship between indicators. Findings reveal a short run positive contractionary fiscal and expansionary monetary effect on trade balance and a long run positive expansionary fiscal and contractionary monetary effect on trade balance, with a 71.27% adjustment rate towards long run convergence. The study also confirms government revenue and monetary policy rate adjustments are key policy instruments in maintaining external balance, however, enacting such policies may incur currency depreciation.