Page 1 of 11

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 92

The Effect of Fiscal Policy Shocks on

Nigeria Economic Output: 1981 – 2015

Mary Bosede Olufayo

Department of Economics, College of Education, Ikere-Ekiti

Abstract

The study investigates the effect of fiscal policy shocks on economic output in Nigeria using

ex-post facto research design. The study was piloted via co-integration and vector

Autoregressive (VAR) modeling spanned from 1981 -2015 indicates co-integrating

relationship among the variable. Thus, a further test to report the variable shocks response

and their innovation adopts vector Autoregressive technique. The estimated result of the

impulse response revealed that a shock to economic growth produce a negative effect on

itself while variance decomposition revealed that GDP grow faster with robust tax system

and sound infrastructural framework, However it recommends that the government through

the central bank of Nigeria should apply appropriate fiscal measure to stabilize the economic

output

Keywords: Fiscal Policy, Economic Output, Co-integration and Vector Autoregressive.

Introduction

Fiscal policy shocks play a significant role

in international finance. It looks at the

effects of fiscal shock on exchange rate,

international price level differentials and

its welfare (Peter and Simeon 2011). Fiscal

policy is the use of government taxation

(revenue) and expenditure (spending) to

regulate the economy. The two policy

instruments are taxation and expenditure.

Today, one of the challenges facing a

country attempting to maintain price

stability is the economic shocks emanating

from abroad, which through trade and

other linkages may pose important effect

on domestic conditions. While shock may

have many other sources, the one of

particular interest to this study is fiscal

policy. To this end, fiscal policy plays a

significant role by improving the output

level, that its role cannot be

overemphasized.

The relevance of fiscal and monetary

policies became popular during the great

depression of the 1930s and ensuring of

the Second World War that the great

economists, notably John Maynard Keynes

advocated a more active role of this

important policy in pursing economic and

social goal (Timbergen 1956). Various

researchers (Adeoye 2006; Omitogun and

Ayinla 2007; Akanni and Osinowo 2013)

believed that fiscal and monetary policies

play a significant role in regulating the

economy during economic recession or

depression, government embark on budget

otherwise known as expansionary fiscal

policy. However, government can also

embark on budget surplus otherwise

known as contractionary fiscal policy in

periods when government feels it is

necessary to cut down its spending in

terms of production in the domestic

economy.

This can be achieved by increasing tax and

reducing its expenditure on public goods.

Also, government often employs fiscal

policy to reduce the demand for goods and

services. Depression can be prevented by

encouraging spending, while inflationary

rate can be checked by discouraging

Page 2 of 11

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 93

spending. Fiscal policy which is the major

determinant of the tax rates influences the

level of spending by influencing the

disposable income. Government spending

can also be controlled (increased or

decreased) to manage inflation and

depression. (Akanni and Osinowo 2013).

The Keynesian School is of the opinion

that government spending is likely to have

a larger expansionary effect in recession

than in expansion. Intuitively, when the

economy has shock, expansionary

government spending shocks are less

likely to crowd out private consumption or

invest in it. To this extent, discretionary

fiscal policy is heavily used in recession to

stimulate aggregate demand. The key to

this question is how the effect of fiscal

shocks varies over business cycle. The

answer to this question is not only

interesting to policymakers in designing

stabilization strategies but it can also help

economics profession to reconcile

conflicting predictions about the effects of

fiscal shocks across different types of

macroeconomic models. (Alan and Yuriy

2010).

Statement of Research Problem

Prior to 1970, after the prosecutions of

Nigeria civil war, various monetary and

fiscal policies measures have been put in

place to revive the economy with a view to

achieve a sustainable growth. However,

the research work of Chukwu (2010)

revealed that there is a negative correlation

between fiscal balances and government

liability in Nigeria, with the correlation of- 0.672. This implies that net borrowing

does not decrease when the fiscal balance

decreases.

The Nigerian economy started witnessing

recession from early 1980s which

eventually led to a depression in the mid- 1980s, it continued without recovering

from it until 1990s. As a result of this, the

government continually initiated policy

measures that could enable them tackle

and overcome the dwindling economy.

Measures taken to tackle the problem were

drawn from the experience of great

depression. These includes increase

government expenditures, Nagayusu

(2003) on the contrary, Okunrounu (1993)

in his research comes up with the fact that

all the measures taken by government, in

the management of macroeconomic

stability has been negative and

unproductive. Thus, the economy is not

performing.

The epileptic performance of the Nigerian

economy could be attributed to the

economic environment, with low capacity

utilization attributed to shortage of foreign

exchange as well as volatile and

unpredictable policies in Nigeria (Isaksson

2001). Against this background, a question

is now posed that; what is the relevance of

spillover effect of fiscal policy shocks on

industrial output in Nigeria?"

Research Questions

The questions needed to be answered in

this study are as follows;

i. How can fiscal policy shocks affect

industrial output?

ii. What is the extent of fiscal policy

shocks on industrial output in Nigeria?

iii. What is the trend of industrial output

growth in Nigeria?

Objectives of the Study

The broad objective of this study is to

access the spillover effect of fiscal policy

shocks on industrial output in the Nigerian

context.

The specific objectives are to;

i. Examine the nature of spillover effect

of fiscal policy shocks on the industrial

output,

ii. Investigate the extent of spillover

effect of fiscal policy shocks on

industrial output in Nigeria,

iii. Access the trend of industrial output

growth in Nigeria.

Significance of the study

The vision of the policy makers is

economic stability. For any country to

achieve the objective of economic

stability, the growth of GDP must be

Page 3 of 11

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 94

sustained over a long period of time

(Blanchard and Fisher 1993). The

argument of the Keynesian School is that

government spending is likely to have a

larger expansion. At times, there are

situations when economy has slack;

expansionary government spending shocks

are likely to crowd out consumption or

investment. To this extent, it is believed

that expansionary fiscal policy is heavily

used in recession to increase aggregate

demand. So, many theories have been

advanced for an explanation of the effect

of fiscal shocks on economic output. Also

there are other policies such as monetary

policy, fiscal policy etc. that can be used to

stabilize the economy. However, the use of

fiscal policy for maintaining economic

stabilization cannot be overemphasized.

The research shall provide recent evidence

on the debate of the relevance of spillover

effect of fiscal policy shocks on the

industrial output in the Nigeria context.

Scope of the study

The study shall be limited to the spillover

effect of fiscal policy shocks on industrial

output in Nigeria. Data will be collected

on Gross Domestic Product (GDP) to

capture variable on industrial output as

well as tax, government expenditure to

capture fiscal policy of the government,

exchange rate interest rate and inflation

Sources of Data

Data for the study will be predominantly

sourced from secondary source. Data will

be collected on tax, government

expenditure, gross domestic product,

inflation and exchange rate between the

periods of 1981-2015 from the Central

Bank of Nigeria Statistical Bulletin.

Literature Review

Shafik and Tom (2010) estimate domestic

and spillover effects on fiscal shock in

member countries in the Euro area. They

built upon the multi country global sector

auto regression (GVAR) approach

developed by Pecaran et al (2004), they

were able to argue against the available

empirical result from VAR estimates of

the effects of fiscal shocks reappraised in

detail in Perotti (2007). Their estimates

suggest possible fiscal spillover effects

between several countries. However, there

are some exceptions; the magnitudes of the

effect vary across countries. The

documented findings in the study were

linked to several VAR studies addressing

the impacts of fiscal shocks mainly on

domestic economy. The majorities of these

studies were particularly interested in the

U.S economy or selected G7 economies,

for example Blanchard and Perotti (2003),

Pappa (2009) and Perotti (2005). Existing

empirical studies on fiscal policy eternities

in the Euro area hypothetically

concentrated on one spillover channel

ignoring others. Also, Andrew et al

examines the effect of fiscal policy on the

state economic growth following the

language multiplier Wald and likelihood

Ratio tests, the data were found to be

characterized by both spatial lag and

spatial error process leading to the

estimation of spatial Durbin Model

Decomposing the result of the Durban

model into direct (spillover), and effect,

the result of various expenditures

categories indicates that the direct (own- state) effects the expenditures are typically

associated with increase in state income

growth, while the spillover effect are

negative.

The empirical findings on the output and

input of manufacturing sector of (Eze)

2013 using Ex-post facto (quantitative

research design) the result indicates that

fiscal and monetary sector output based on

the magnitude and level of significance

and p-value and that there is long run

relationship between fiscal policy and

manufacturing sector output. Roel et al

(2005) explore the international spillover

from fiscal policy shocks via trade in

Europe combine a panel VAR modeling

government spending, net taxes and GDP

with a panel trade model. The result

reveals that, on average a public spending