Fiscal Policy and Macroeconomic Stability in Nigeria: how effective are fiscal rules?

Authors

E. A. Udeaja, Central Bank of Nigeria
J. M. Tule, Central Bank of Nigeria
Z. A. El-Yakub, Central Bank of Nigeria
J. A. Rotimi, Central Bank of Nigeria

Publisher

Central Bank of Nigeria

Keywords

macroeconomic stability, fiscal rules, government size

Abstract

The paper examines the impact of fiscal rules on macroeconomic stability in Nigeria. Using data spanning 2005Q1-2021Q4, the study adopts the Autoregressive Distributed Lag (ARDL) approach and constructs output volatility to account for the role of gross fixed capital formation (GFCF), tax revenue, government size, and trade openness in assessing macroeconomic stability. The findings reveal that, Nigeria has deviated from the established rule limits since 2017. The study also finds that increase in government size and GFCF are instrumental to attaining macroeconomic stability during economic crisis. On the other hand, increasing trade openness and taxation are inimical to the macroeconomic stability of import-dependent economies with low levels of production. Hence, the study recommends that government should establish an independent fiscal council with the mandate to monitor and ensure adherence to established rule limits and review the existing rule-based framework to remove ambiguities and be anchored on robust institutional mechanisms that are in line with best practices.

Author Bio

Udeaja, E. A., Tule, J. M., El-Yaqub, Z. A., and Rotimi, J. are staff if Research Department, Central Bank of Nigeria, Abuja.

Publication Title

CBN Economic and Financial Review

Issue

2

Volume

60

First Page

1

Last Page

26

Classification-JEL

E60, E63, H50, H20

Recommended Citation

Udeaja, E. A., Tule, J. M., El-Yaqub, Z. A., and Rotimi, J. (2022). Fiscal Policy and Macroeconomic Stability in Nigeria: how effective are fiscal rules? CBN Economic and Financial Review, 60(2). 1 - 26.