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The macroeconomic effect of COVID-induced economic policy uncertainty in Nigeria: a DSGE approach

The macroeconomic effect of COVID-induced economic policy uncertainty in Nigeria: a DSGE approach This study examined the macroeconomic effects of COVID-19-induced economic policy uncertainty (EPU) in Nigeria. The study considered the effects of three related shocks: EPU, COVID-19 and correlated economic policy uncertainty and COVID-19 shock.Design/methodology/approachFirst, the study presented VAR evidence that fiscal and monetary policy uncertainty depresses real output. Thereafter, a nonlinear DSGE model with second-moment fiscal and monetary policy shocks was solved using the third-order Taylor approximation method.FindingsThe authors found that EPU shock is negligible and expansionary. By contrast, COVID-19 shocks have strong contractionary effects on the economy. The combined shocks capturing the COVID-19-induced EPU shock were ultimately recessionary after an initial expansionary effect. The implication is that the COVID-19 pandemic-induced EPU adversely impacted macroeconomic outcomes in Nigeria in a non-trivial manner.Practical implicationsThe result shows the importance of policies to cushion the effect of uncertain fiscal and monetary policy path in the aftermath of COVID-19.Originality/valueThe originality of the paper lies in examining the impact of COVID-19 induced EPU in the context of a developing economy using the DSGE methodology. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png African Journal of Economic and Management Studies Emerald Publishing

The macroeconomic effect of COVID-induced economic policy uncertainty in Nigeria: a DSGE approach

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2040-0705
DOI
10.1108/ajems-04-2022-0154
Publisher site
See Article on Publisher Site

Abstract

This study examined the macroeconomic effects of COVID-19-induced economic policy uncertainty (EPU) in Nigeria. The study considered the effects of three related shocks: EPU, COVID-19 and correlated economic policy uncertainty and COVID-19 shock.Design/methodology/approachFirst, the study presented VAR evidence that fiscal and monetary policy uncertainty depresses real output. Thereafter, a nonlinear DSGE model with second-moment fiscal and monetary policy shocks was solved using the third-order Taylor approximation method.FindingsThe authors found that EPU shock is negligible and expansionary. By contrast, COVID-19 shocks have strong contractionary effects on the economy. The combined shocks capturing the COVID-19-induced EPU shock were ultimately recessionary after an initial expansionary effect. The implication is that the COVID-19 pandemic-induced EPU adversely impacted macroeconomic outcomes in Nigeria in a non-trivial manner.Practical implicationsThe result shows the importance of policies to cushion the effect of uncertain fiscal and monetary policy path in the aftermath of COVID-19.Originality/valueThe originality of the paper lies in examining the impact of COVID-19 induced EPU in the context of a developing economy using the DSGE methodology.

Journal

African Journal of Economic and Management Studies – Emerald Publishing

Published: Feb 24, 2023

Keywords: COVID-19; Economic policy uncertainty; Fiscal policy; Monetary policy; DSGE models; Stochastic volatility; E61; E63; C69

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