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

Adams Adeiza, Queen Esther Oye and Philip O. Alege

African Journal of Economic and Management Studies, 2022, vol. 14, issue 1, 106-120

Abstract: Purpose - This 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/approach - First, 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. Findings - The 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 implications - The result shows the importance of policies to cushion the effect of uncertain fiscal and monetary policy path in the aftermath of COVID-19. Originality/value - The 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.

Keywords: COVID-19; Economic policy uncertainty; Fiscal policy; Monetary policy; DSGE models; Stochastic volatility; E61; E63; C69 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajemsp:ajems-04-2022-0154

DOI: 10.1108/AJEMS-04-2022-0154

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