Abstract
This study investigated the relative effectiveness of trade and policy shocks on sectoral output growth in a small open Nigerian economy. It is a country-specific, time series study verifies whether there is difference in the effect of sectoral output response to policy shocks in Nigeria. A CVAR model was specified to assess the effects of policy shocks on real aggregate and sectoral output measures. The model included oil price shock and an interactive term of trade openness as measures of supply and external shocks to the economy. The empirical results showed that there was remarkably difference in sectoral output responses to policy distortion. The effects of monetary policy shocks were positive and significant on manufacturing, service and industrial sector while fiscal policy shock was only significant and positive on agricultural output growth. The result further showed that international oil price shock and trade openness had pronounced negative effects on both sectoral and aggregate outputs. In addition, oil and trade openness’ negative effects overwhelmed the positive effects of fiscal and monetary policy shocks. The policy implication of the finding is that the effectiveness of domestic macroeconomic policy is constrained by the external shocks from both oil price and trade openness. Thus, confirming the open economic version of policy ineffectiveness proposition of the New classical macroeconomic in Nigeria
Highlights
An increasing number of studies had begun to raise issue about the consequences of both oil price and trade policy on the effectiveness of domestic effort at mobilizing resource for growth. Ogun and Akinlo (2010) established that attempts to use monetary policy to stimulate economic growth through credit mobilization had been impaired by the external shock from the trade and financial reform in Nigeria
An oil price shock was found to be the main determinant on all the output growth, openness was only significant contributor in industrial output
The fact that against expectation, the expansionary policy shocks adversely affected real output while contractionary policy shocks boosted aggregate demand confirmed the irrelevance of macroeconomic policy as the veritable tool for stimulating real growth in Nigeria
Summary
An increasing number of studies had begun to raise issue about the consequences of both oil price and trade policy on the effectiveness of domestic effort at mobilizing resource for growth. Ogun and Akinlo (2010) established that attempts to use monetary policy to stimulate economic growth through credit mobilization had been impaired by the external shock from the trade and financial reform in Nigeria. An increasing number of studies had begun to raise issue about the consequences of both oil price and trade policy on the effectiveness of domestic effort at mobilizing resource for growth. Ogun and Akinlo (2010) established that attempts to use monetary policy to stimulate economic growth through credit mobilization had been impaired by the external shock from the trade and financial reform in Nigeria. Little effort, in the previous attempts in Nigeria, was made at analyzing the role external shocks from both trade openness and oil price in this circumstance. Perhaps the fact that the Nigerian economy is trade and oil dependent makes such analysis exigent. Overall external trade policy of government has crucial role in facilitating the smooth running of the economy
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