The macroeconomic effect of COVID-induced economic policy uncertainty in Nigeria: a DSGE approach

Abstract

PurposeThis study examined the macroeconomic effects of COVID-19-induced economic policy uncertainty (EPU) in Nigeria. The study considered the effects of three related shocks: EPU, COVID-19 and correlated economic policy uncertainty and COVID-19 shock.Design/methodology/approachFirst, the study presented VAR evidence that fiscal and monetary policy uncertainty depresses real output. Thereafter, a nonlinear DSGE model with second-moment fiscal and monetary policy shocks was solved using the third-order Taylor approximation method.FindingsThe authors found that EPU shock is negligible and expansionary. By contrast, COVID-19 shocks have strong contractionary effects on the economy. The combined shocks capturing the COVID-19-induced EPU shock were ultimately recessionary after an initial expansionary effect. The implication is that the COVID-19 pandemic-induced EPU adversely impacted macroeconomic outcomes in Nigeria in a non-trivial manner.Practical implicationsThe result shows the importance of policies to cushion the effect of uncertain fiscal and monetary policy path in the aftermath of COVID-19.Originality/valueThe originality of the paper lies in examining the impact of COVID-19 induced EPU in the context of a developing economy using the DSGE methodology.