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Rent‐seeking and optimal fiscal‐monetary policy rules in Nigeria: A DSGE approach

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  • Oye Queen Esther
  • Adeiza Adams

Abstract

This study examines the conduct of optimal fiscal and monetary policy in Nigeria under the assumption of a rent‐seeking government. To answer this question, a Dynamic Stochastic General Equilibrium (DSGE) model featuring a rent‐seeking fiscal authority is calibrated. The study also conducted a sensitivity analysis to compare the welfare effect of optimal simple policy rules under a corrupt versus benevolent regime. The results from the study showed that optimal monetary policy should target the double mandate of price and output stabilization when the government is a rent‐seeker. The study also found that it is optimal for the Central Bank to commit to an active monetary stance. The optimal fiscal policy rule in a rent‐seeking economy is passive and pro‐cyclical. Furthermore, welfare is negligibly better off in the benevolent economy. From a policy perspective, rent‐seeking activities are triggered by the proportion of rent‐seeking agents. This induces inefficiencies in government spending, which constrains growth in a developing economy. Furthermore, rent‐seeking can “coerce” the Central Bank of Nigeria to focus on a double mandate to stabilize both prices and output. Therefore, it is desirable for the monetary authority to possess due independence in controlling prices without interference from the fiscal authority.

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  • Oye Queen Esther & Adeiza Adams, 2024. "Rent‐seeking and optimal fiscal‐monetary policy rules in Nigeria: A DSGE approach," African Development Review, African Development Bank, vol. 36(3), pages 535-551, September.
    • Handle: RePEc:bla:afrdev:v:36:y:2024:i:3:p:535-551
    DOI: 10.1111/1467-8268.12777
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