Optimal Fiscal and Monetary Policy Rules in Nigeria
Optimal Fiscal and Monetary Policy Rules in Nigeria

Summary/Abstract: Commodity-exporting and developing economies such as Nigeria can adopt fiscal rules that guarantee short-term macroeconomic stability and long-term fiscal sustainability. This study, in this respect, considered the relevance of fiscal rules where the fiscal balance of government reacts to the revenue base and state of the economy. The study also examined the desirability of the Taylor￾type rule for the Nigerian economy. The study computed optimal monetary and fiscal rules using a Linear-Quadratic approximation of the equilibrium conditions in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. The parameters of the DSGE model were calibrated to suit the Nigerian economy. The main findings of the study showed that the optimized monetary rule obeys the Taylor principle while the optimized fiscal rule ensures a passive and countercyclical fiscal path. The implication of the finding shows that in the presence of a government that commits to a fiscal balance rule, it is desirable for the central bank to stabilize inflation while the government should avoid the procyclical bias.

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