SOURCE:

Faculty: Social Sciences
Department: Economics

CONTRIBUTORS:

Muse, B.O.
Nwogwugwu, U.C.C.

ABSTRACT:

ABSTRACT
The main motivation of this study is that the present study extended the fiscal policy measures of government expenditure to disaggregated capital and recurrent expenditure and includes tax revenue, borrowing and transfer payment to government revenue which were ignored in other previous studies in the literatures such as Aregbeyen and Fasanya(2017). However, in order to enhance the effectiveness of fiscal policy in Nigeria, this study investigated on how fiscal policy in Nigeria responds to oil price shocks. The specific objectives are to: examine if the response of fiscal policy to oil price shock is asymmetric or symmetric in the case of Nigerian economy; determine if the response of fiscal policy to oil price shock is a short or long run asymmetric or symmetric phenomenon; determine which dimension of fiscal policy measures namely: expenditure, tax revenue, borrowing and transfer payment is more vulnerable to oil price shocks. Building on an intertemporal macroeconomic framework as its theoretical framework, the study explored both the linear and nonlinear Autoregressive Distributed Lag Model (ARDL) to empirically evaluate the response of Nigerian fiscal policy to oil price shocks. To achieve its first objective, a WALD restricted test was performed on the nonlinear ARDL results, while ARDL bound cointegration test was performed to achieve the second objective. The study used variant measures of government fiscal policy profiles including aggregated and disaggregated expenditure, tax revenue, borrowing and transfer payment to achieve its third objective. The bound cointegration test revealed evidence of long run relationship between fiscal policy and oil price movement in Nigeria. The Wald test results however, failed to reject the null hypothesis of no asymmetry except when the government fiscal expenditure is capital intensive. Estimated coefficients from the nonlinear ARDL asymmetric model showed that the significant and positive response of fiscal policy to oil price is likely to be more pronounced if the oil price shock is a positive shock. The results obtained from the study showed that irrespective of the measure of fiscal policy considered, the significant responses of fiscal policy to oil price shocks in Nigeria tends to matter more in the short run situation. Moreover, the tendency of the fiscal policy in Nigeria responding asymmetrically to oil price shocks depend on which measure of fiscal policy is being considered. Hence, it is recommended that effort at enhancing the effectiveness of fiscal policy in Nigeria should take cognisance of its vulnerability to oil price shocks.