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

• Published in: African journal of economic and management studies Vol. 14; no. 1; pp. 106 - 120
• Main Authors: Adeiza, Adams, Oye, Queen Esther, Alege, Philip O.
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 24-02-2023; Emerald Group Publishing Limited
• Subjects: Consumption; Coronaviruses; COVID-19; Econometrics; Economic conditions; Economic crisis; Economic growth; Economic indicators; Economic policy; Fiscal policy; GDP; Great Recession; Gross Domestic Product; Households; Induced; Inflation; Investments; Literature reviews; Macroeconomics; Monetary policy; Pandemics; Uncertainty; Volatility; Nigeria; United States > US; COVID-19; DSGE models; Fiscal policy; E61; E63; Economic policy uncertainty; C69; Monetary policy; Stochastic volatility
• ISSN: 2040-0705; 2040-0713
• DOI: 10.1108/AJEMS-04-2022-0154

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.