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Policy asymmetries and fiscal sustainability: evidence from Nigeria

Author

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  • Opeoluwa Adeniyi Adeosun
  • Olumide Steven Ayodele
  • Olajide Clement Jongbo

Abstract

Purpose - This study examines and compares different specifications of the fiscal policy rule in the fiscal sustainability analysis of Nigeria. Design/methodology/approach - This is methodologically achieved by estimating the baseline constant-parameter and Markov regime switching fiscal models. The asymmetric autoregressive distributed lag fiscal model is also employed to substantiate the differential responses of fiscal authorities to public debt. Findings - The baseline constant-parameter fiscal model provides mixed results of sustainable and unsustainable fiscal policy. The inconclusiveness is adduced to instability in primary fiscal balance–public debt dynamics. This makes it necessary to capture regime switches in the fiscal policy rule. The Markov switching estimations show a protracted fiscal unsustainable regime that is inconsistent with the intertemporal budget constraint (IBC). The no-Ponzi game and debt stabilizing results of the Markov switching fiscal model further revealed that the transversality and debt stability conditions were not satisfied. Additional findings from the asymmetric autoregressive model estimation show that fiscal consolidation responses vary with contraction and expansion in output and spending, coupled with downturns and upturns in public debt dynamics in both the long and short run. These findings thus confirm the presence of asymmetries in the fiscal policy authorities' reactions to public debt. Further, additional evidences show the violation of the IBC which is exacerbated by the deleterious effect of the pro-cyclical fiscal policy response in boom on the improvement of the primary fiscal balance. Originality/value - This study deviates from the extant literature by accommodating time variation, periodic switches and fiscal policy asymmetries in the fiscal sustainability analysis of Nigeria.

Suggested Citation

  • Opeoluwa Adeniyi Adeosun & Olumide Steven Ayodele & Olajide Clement Jongbo, 2021. "Policy asymmetries and fiscal sustainability: evidence from Nigeria," African Journal of Economic and Management Studies, Emerald Group Publishing Limited, vol. 12(2), pages 302-320, April.
  • Handle: RePEc:eme:ajemsp:ajems-08-2020-0389
    DOI: 10.1108/AJEMS-08-2020-0389
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    Cited by:

    1. Adeniyi Adeosun, Opeoluwa & Anagreh, Suhaib & Tabash, Mosab I. & Adedokun, Adebayo, 2023. "Revisiting the connectedness between oil prices and uncertainty indicators in BRICS countries," Resources Policy, Elsevier, vol. 86(PA).

    More about this item

    Keywords

    Fiscal sustainability; Fiscal policy regimes; Policy asymmetries; Pro-cyclicality; Public debt; Nigeria; E62; F34; H60; H63;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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