Exogenous Macroeconomic Variables and Nigerian Output: An Extension of the Taylor Rule and IS-MP-PC Model

Abstract

This paper examines the current economy reality in Nigeria, where almost all the macroeconomic variable failed to normalize with fear and panic that we no longer understand the workings of the economy. Furthermore, this study extends the theoretical foundation of IS-MP-PC model and Taylor rule by incorporating net-export gains. Using quarterly data from 1971-2012, the study implements the ADF and PP unit root test to test the stationary properties of the series, the Johansen co-integration test to examine the existence of the long-run relationship and the error correction model for the short-run relationships. Overall findings reported that real output in Nigeria is negatively influenced by the adjusted exchange rate, real government deficit spending, expected inflation rate and world industrial output, and positively affected by net export and world interest rate. Appropriate policy options towards boosting the national outputs would help normalize the economy including the macroeconomic variables.

JEL Classifications: E31, E37, E59

Keywords: IS-MP-PC model, Taylor rule, exchange rate, deficit spending, world interest rate, net export