Project Materials

FISCAL-MONETARY POLICY MIX AND OUTPUT RESPONSE IN NIGERIA.

CHAPTER ONE

INTRODUCTION

The importance of economic policy as a tool for economic stabilisation by governments in various economies throughout the world cannot be overstated. Some of these policy measures may have an overall economic impact (e.g., the budget and inflation), while others may have specific consequences, such as a consumption tax on consumer goods (Killick, 1981; Black, Calitz, Steenekamp, & Ajam, 2000).

Policymakers throughout the world use a variety of strategies, either separately or in combination, to stabilise the boom-bust cyclical fluctuations of economic activity. The two most frequent macroeconomic management policies are fiscal and monetary policies.

The Central Bank implements monetary policy by adjusting the money supply and interest rates. The government of that economy manages fiscal policy by adjustments in government expenditure and taxes (Liborio, 2011; Hussain, Wijeweera, & Hoang, 2012).

Despite the fact that monetary and fiscal policies are conducted by separate institutions, they are far from autonomous. In reality, a change in one may affect the effectiveness of the other, and hence the total effects of any policy change.

Since the 1980s, economists have generally agreed that monetary policy is a more effective stabilisation tool than fiscal policy (Mishkin, 2004; Mankiw, 2005; and Bullard, 2012); however, the recent global financial crisis of 2007 has renewed much interest in fiscal stimulus.

In recent years, policymakers have been pushed to take unusual measures to stabilise the national economy. While monetary officials use quantitative easing (the purchase of financial assets to decrease long-term interest rates

hence boosting the money supply), fiscal authorities increase government spending and lower taxes to stimulate employment and output (Liborio, 2011).

The global economic crisis, which lasted until 2009, had a considerable negative impact on the real economic operations of many developing countries. For example, Nigeria’s real GDP growth rate fell from 7.6% in 2006 to 6.0% at the start of the crisis in 2008.

The global crisis had a far-reaching impact, with negative consequences in Nigeria’s agriculture, industrial, and wholesale sub-sectors (CBN, 2009). Similar patterns were noticed in various countries around the world.

To ensure that their economies are insulated or protected from the potential negative effects of such snowballing, many countries, particularly developing countries, have used domestic macroeconomic policy to re-engineer their economies and provide some policy palliatives that can aid in economic stabilisation.

Nigeria, in particular, responded to the global economic crisis by implementing both monetary and fiscal stimulants as proactive steps to save the economy from spiralling into severe economic misery. The government’s policy actions focused on three broad fronts: monetary policy, fiscal policy, and trade policy.

The Nigerian government and other policymakers have extensively employed fiscal and monetary policies to promote output, particularly the tools of government expenditure, money supply, and monetary policy rate (MPR).

To understand the policy basis of these fluctuations in output performance across time, we must look back to Nigeria’s fiscal and monetary policy.