Shocks in Aggregate Demand to Monetary and Fiscal Policies’ Adjustment in Nigeria: A Simulation Approach

Abstract

The study examined the shocks in aggregate demand to monetary and fiscal policies adjustment in Nigeria using time series annual data from 1986-2022. The study used secondary data obtained from the Central Bank of Nigerian (CBN) Annual Statistical Bulletin, National Bureau of Statistics NBS), and World Bank Financial Report. The study constructs simple structural macroeconomic models made up of three blocks: consumption, investment, and export-import sector that contain 21 variables. The variables are linked to one another through 8 behavioural equations and 4 identities. The models were estimated and analyzed using Two Stage Least Square methods and a simulation experiment was also conducted on the simple structural macroeconomics models. The study finds that broad money supply, interest rate, government expenditure, taxation and public debt have significant influence on aggregated demand in Nigeria during the period under investigation. The baseline simulation demonstrates good tracking power of the actual from the baseline simulation as the nature of the oscillation suggested. The study, recommends that the government should encourage expansionary monetary and fiscal policies by lowering interest rate in order to encourage investors to borrow for investment.