IMPACTS OF FUNDAMENTAL MACROECONOMIC SHOCKS AND ANTI – SHOCK POLICIES IN NIGERIA: A DSGE ANALYSIS

Abstract

This paper extensively used the framework of the dynamic stochastic general equilibrium model (DSGEM) to examine fundamental macroeconomic variables and key policy response variables in Nigeria. The model is used to evaluate the effects of fundamental macroeconomic shocks – general price level, the interest rate, the real exchange rate, and inflation and to test the effectiveness of different policies, using the impulse responses of the variables to one standard deviation and the variance decomposition analysis, in explaining the variations in the main macroeconomic variables. Against this background, this paper analyzes whether the Nigerian economy has any possibility at all to apply anti-shock policies in order to reduce or eliminate the short and long run effects of the stated fundamental macroeconomic shocks.  The results show considerable empirical evidence that the foreign interest rate shock leads to much more persistent responses in both domestic and foreign variables. The foreign supply and inflation shocks increase domestic output gap, inflation and interest rates. Higher interest rate and real exchange rate appreciation reduce aggregate demand as well as a fall in output gap and inflation. The policy responses of domestic variables to external shocks have been captured by the method analyses. However domestic policy distortions increase economic effects.