Empirical Analysis of Fiscal Policy Shocks and Current Account Dynamics in Nigeria

Abstract

The study examines the effects of fiscal policy shocks on the current account as well as the dynamic interactions among fiscal policy shocks and current account with the other macroeconomic variables: real output, real interest rate and exchange rate for Nigeria over the periods 1980:1-2010:4. The identification of fiscal policy shocks is achieved via structural VAR approach proposed by Blanchard-Perotti (2002). The results of this study indicate that the expansionary fiscal policy shock has a positive effect on output, exchange rate and negative impacts on current account balance and interest rate. By implication, this study suggests that fiscal policy can stimulate economic activity through expenditure expansions at a cost of lower interest rate and exchange rate appreciation in the medium term and a sustained current account balance will enhance output via fiscal consolidation.