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

Adams Adeiza (Faculty of Entrepreneurship and Business, Global Entrepreneurship Research and Innovation Center, University of Malaysia Kelantan, Kelantan, Malaysia)
Queen Esther Oye (Department of Economics and Development Studies, Covenant University, Ota, Nigeria)
Philip O. Alege (Department of Economics and Development Studies, Covenant University, Ota, Nigeria)

African Journal of Economic and Management Studies

ISSN: 2040-0705

Article publication date: 19 September 2022

Issue publication date: 24 February 2023

269

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

Citation

Adeiza, A., Oye, Q.E. and Alege, P.O. (2023), "The macroeconomic effect of COVID-induced economic policy uncertainty in Nigeria: a DSGE approach", African Journal of Economic and Management Studies, Vol. 14 No. 1, pp. 106-120. https://doi.org/10.1108/AJEMS-04-2022-0154

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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