Fiscal Policy in a DSGE Model of a Resource-Rich Emerging Economy: The Nigerian Experience

Abstract

This paper examines the role of fiscal policy in driving macroeconomic dynamics in a resource-rich emerging economy like Nigeria. Specifically, the paper investigates the macroeconomic implications of fiscal policy using a small open economy dynamic stochastic general equilibrium model that features oil in the fiscal rule. The model is estimated via Bayesian methods using data covering the period 2010Q1- 2021Q1. The results show that the feedback coefficient of output in the fiscal rules is mainly negative, indicating a counter-cyclical fiscal stance. Also, increased oil revenue leads to a rise in government consumption, investment and transfer payments. Further evidence indicates that government spending and transfer payments rose in response to increased debt. We also show that fiscal shocks are highly persistent and that government spending on consumption and investment, tax instruments and transfer are expansionary.