MACROECONOMIC SHOCKS AND INFORMAL SECTOR DYNAMICS IN NIGERIA: EVIDENCE FROM NEW KEYNESIAN DSGE MODEL
MACROECONOMIC SHOCKS AND INFORMAL SECTOR DYNAMICS IN NIGERIA: EVIDENCE FROM NEW KEYNESIAN DSGE MODEL
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Date
2020-02
Authors
BELLO, Usman Adamu
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Abstract
The efficacy of economic policy partly resides on a good understanding of the underlying features of the economy. Unlike developed economies, developing economies are characterized by the existence of a large informal economy with contrasting optimizing constraint faced by economic agents in the formal economy. This study attempts to simulate a New Keynesian DSGE model that mimics reality by incorporating key features of the underlying economy, such as the informal sector, distortionary tax, commodity sector (oil export) and openness. In developing the model, the study introduced price stickiness in the formal sector, and this distinguishes the flexible prices in the informal sector. Other elements introduced in the informal economy include non-Ricardian households and untaxed credit constraint firms that produce tradable and non-tradable goods. Thus, the formal sector has Ricardian households with credit and non-credit constraint firms. The model was taken to data and estimated using Nigerian data. The study simulates four distinct shocks in order to examine the unique roles of the underlying economy. Two of these shocks were domestic originating shocks, which reflects the adoption of technology in the domestic economy. That captures and accounts for the productivity shock. Also, a sector-specific shock originating from the informal sector, which accounts for the existence of a large informal economy. The other two shocks are external shocks in line with oil commodity export and the openness of the economy. Thus, the study examines oil price shock and foreign inflationary shocks. Also, the effects of macroeconomic policies (monetary and fiscal policies) were analyzed. The result shows that positive markup shock from the informal economy, the oil price shock, and foreign inflationary shock have an inflationary effect on the domestic economy. However, productivity shock has a short-run deflationary effect. Across all the shocks considered, informality was found to have a distortionary effect on output. It has the resilient to withstand recessionary periods, and it has a distortionary effect on fiscal revenue with a propensity to create fiscal imbalance and debt accumulation. The result shows that informal goods-producing firms are inefficient but have lower marginal cost due to non-remittance of tax. Monetary policy was found to have a potency threshold in curbing inflation that originates from domestic economy and oil price shock, but such potency (optimal) threshold is ineffective in tackling inflation associated with external shocks (foreign inflationary shock). Furthermore, monetary policy was found to be weak and less effective in credit constraint informal economy but more effective in the formal sector. This study recommends strengthening the credit market in credit constrain informal economy through microfinance banks and improving financial inclusion measures (including thrift and cooperative societies) in order to improve the efficacy of monetary policy. Also, fiscal policy should aim at channeling expenditure through aggregate supply than aggregate demand in order to reduce revenue leakage associated with the consumption of goods produced in the informal sector
Description
A THESIS SUBMITTED TO THE SCHOOL OF POSTGRADUATE STUDIES, AHMADU BELLO UNIVERSITY, ZARIA
IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DOCTOR OF PHILOSOPHY DEPARTMENT OF ECONOMICS
Keywords
MACROECONOMIC,, SHOCKS AND INFORMAL SECTOR DYNAMICS,, EVIDENCE,, NEW KEYNESIAN DSGE MODEL