Abstract
The study assessed the effects of external shocks on fiscal policy in Nigeria. Vector auto-regression VAR estimating technique is adopted to achieve the set objectives of the study. The VAR model comprises of the following variables GDP, oil output, oil price, government revenue, government expenditure, external reserve, exchange rate, fiscal balance, and non-oil export. These variables represent the external shocks, the growth variables, fiscal variables and some other macroeconomic variables. The VAR results show that oil price and non-oil export are the most important external shocks affecting fiscal policy in Nigeria. It was also discovered that public debt shock has no significant impact on government expenditure. In addition, external reserve and exchange rate shocks also have a significant impact on fiscal policy. Finally, government expenditure shock failed to have a significant impact on the GDP. The implication of these results is that the effectiveness of fiscal policy in achieving macroeconomic objectives in Nigeria depends on these identified shocks.
Highlights
Over the years the fiscal policy has been a major policy used side by side monetary policy to maintain economic stability, increase output and promote the overall economic development of a country
We consider the reactions of the variables to shock from each of the identified external shocks, in other words, the spiral effects of the shocks emanating from oil price, debt, nonoil export, external reserve and exchange rate is examined as it affects fiscal policy variables and the GDP
Findings from the study have shown that government revenue among the fiscal variables is mostly affected by external shocks
Summary
Over the years the fiscal policy has been a major policy used side by side monetary policy to maintain economic stability, increase output and promote the overall economic development of a country. Fiscal policy has been identified as a policy that tends to have long-run relationship with growth. There is a general belief that such policy will be highly susceptible to external influences which might mitigate it's having a sustainable effect on output over the long run period horizon it is designed for (Olasunkanmi, 2013). Two major variables of fiscal policy that is, the government revenue and expenditure have been identified to be highly prone to external influence especially in a country that is naturally endowed and heavily dependent on imported goods (World Bank, 2012). The nature of fiscal policy practiced in Nigeria for the past two decades has been in the form of deficit. A major feature of fiscal policy in Nigeria over the years has been fiscal deficits
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