Economic Stabilization Policy in Nigeria: Reassessing the Classical-Keynesian Uncertainty Controversy

Abstract

The economic theory proposes adjustment in the lending interest rate as a means of attaining macroeconomic stabilization through inflation targeting. The inability of policymakers to bring about the desired change in inflation without looking at the past values of the lending interest rate and inflation draws us into the economic uncertainty debate between the Classical and Keynesian schools of thought. Using the lending interest rate as a proxy for macroeconomic stabilization policy, this study determined whether it is the classical assertion that the future behaviour of economic variables can be perfectly predicted from historical data that holds for Nigeria, or it is the opposite notion of Keynes. This was done by analyzing trends in Nigeria’s lending interest rate, inflation rate and economic growth over the period of 1986 to 2020. The relevance of macroeconomic stabilization policy in Nigeria was also examined using a structural vector autoregressive model. Findings agreed with the Keynesian notion that due to uncertainty, the future behaviour of economic variables cannot be predicted by historical data. This has made the macroeconomic stabilization policy in Nigeria ineffective. However, the policy is still relevant in Nigeria and should not be undermined. The study recommends alternative policy options such as formulating an employment-targeting stabilization policy alongside the inflation targeting policy as this may likely stabilize the economy and also prepare the economy for economic uncertainty.