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Macroeconomic Policy Effectiveness and the Informal Economy in Nigeria: A DSGE Approach

Adu, Omobola and Alege, P. O. and OLURINOLA, Isaiah Oluranti (2020) Macroeconomic Policy Effectiveness and the Informal Economy in Nigeria: A DSGE Approach. Research in World Economy, 11 (6). pp. 51-62. ISSN 1923-3981 E-ISSN 1923-399X

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Evaluating the approach and conduct of macroeconomic policy is crucial towards the provision of effective economic policies that addresses business cycles. However, to properly evaluate the effectiveness of macroeconomic policies, there is the need to pay attention to the structure of the economy. In Nigeria, there is a particular case for the introduction of informality in macroeconomic models. Hence, this study presents a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) Model featuring an informal sector in order to understand how the presence of informality affects the effectiveness of macroeconomic policies in Nigeria. The Bayesian estimation of the DSGE model provides evidence that the informal economy tends to play a buffer role or an absorbing role in reducing the effectiveness of a monetary policy shock in contracting output in comparison to an economy without informality. Therefore, this study recommends that with the aim of limiting the role of the informal economy towards absorbing some of the effects of shocks to the domestic economy, the government needs to implement market-friendly policies that would help merge the informal economy with the formal economy.

Item Type: Article
Uncontrolled Keywords: DSGE, informal economy, Bayesian estimation
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
Divisions: Faculty of Law, Arts and Social Sciences > School of Social Sciences
Depositing User: nwokealisi
Date Deposited: 12 Jan 2024 15:21
Last Modified: 12 Jan 2024 15:21

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