Abstract
AbstractThis study sets out to examine the effects of the interaction of subsidy removal on premium motor spirit (PMS) and exchange rate devaluation on macroeconomic instability in Nigeria. In this regard, this study adopted the Bayesian vector autoregressive model (BVAR) identified with sign‐and‐zero restrictions for annual data between 1985 and 2022. The empirical results reveal that both the removal of subsidies on PMS and the devaluation of the naira exchange rate significantly undermine real gross domestic product (GDP) growth and raise inflationary pressures in Nigeria. One important implication of this finding is that the ongoing subsidy reforms in the energy sector and associated devaluation of the naira exchange rate raise the risk of stagflation in Nigeria. Secondly, the simulation shows that simultaneous subsidy removal on PMS and exchange rate devaluation can trigger macroeconomic instability. This finding implies that stabilising PMS price and the exchange rate is key to achieving macroeconomic stability in Nigeria. Thus, this study recommends that Nigeria should be cautious and act quickly to cushion the price of PMS from the vagaries of foreign exchange market fluctuations to improve macroeconomic stability in the country.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
