Abstract
This paper examines the effects of fiscal policy shocks on private consumption in Nigeria. Albeit, there is a considerable number of works examining the effects of fiscal policy shocks on private consumption globally but in Nigeria, no study has used the structural VAR approach by Blanchard and Perotti (2002) as used in this paper. This approach relies on institutional information about the tax and transfer systems and the timing of tax collection to identify the automatic response of taxes and spending to private consumption as well as to infer fiscal shocks. The key result of this paper is that positive government spending shocks in Nigeria have an instantaneous negative effect on private consumption. The effect becomes significant in the period following the shock. Also, positive tax shocks have a negative effect on private consumption in the period of a shock and the effect becomes statistically insignificant afterwards. On this premises, one-off changes in government spending and taxes in Nigeria are long-lived and short-lived respectively. Thus, the government expenditure changes can be used to support private consumption in the long-run while that of taxes can only be used to support private consumption for a short period.
Highlights
In most studies on fiscal policy around the world especially in Nigeria, the inability to identify the changes in policy variables that are attributable to actual policies rather than to endogenous responses to economic conditions has been a major debatable issues among the policy makers as well as economic scholars
Apart from the fact that the aforementioned studies have failed to empirically consider the institutional information about the tax and transfer systems as well as the timing of tax collection in their studies, there is no empirical literature in Nigeria that has used the method of Blanchard and Perotti (2002) to examine the relationship between fiscal policy shocks and private consumption
Discussion of the Results of the Effect of Fiscal Policy Shocks on Private Consumption: Using the Structural Vector Autoregressive (SVAR) approach proposed by Blanchard and Perotti (2002) and Perotti (2004) to examine the impact of fiscal policy shocks on private consumption, the paper arranged the variables in the following order- government expenditure, tax revenue, private consumption government debt and interest rate
Summary
In most studies on fiscal policy around the world especially in Nigeria, the inability to identify the changes in policy variables that are attributable to actual policies rather than to endogenous responses to economic conditions has been a major debatable issues among the policy makers as well as economic scholars. The delay in legislation, the lags in actual implementation of pronounced policies and the time for policy stabilization are central problems faced in the empirical analysis of fiscal policy realm To tackle this issue, studies have examined the responses of government spending shocks and tax revenue shocks on private consumers’ behaviour in Nigeria (Onodje, 2009; Sousa, 2009; Favero, Giavazzi & Francesco, 2007; Orisadare, 2012). The over-reliance on the oil proceeds and neglect of agricultural products have made the economy to suffer deeply from the oil price crises that oil sector has continuously witnessed over the periods in recent time The adamant of this has resulted in the recent decreased in government revenue in Nigeria. To restore the loss in government revenue in Nigeria, government has changed the structure of the tax system and reviews company tax which may reduce companies’ social responsibilities to the community
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