EstimatingSmallScaleMacroeconometricModel(SSMM)ForNigeriaADynamicStochasticGeneralEquilibrium(DSGE)Approach.docVIP

ESTIMATING SMALL SCALE MACROECONOMETRIC MODEL (SSMM) FOR NIGERIA: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE) APPROACH by Adebiyi, Michael Adebayo, PhD Central Bank of Nigeria, Central Business District, Garki, Abuja, Nigeria E-mail maadebiyi@ or mikebiyi@ Tel: 234-0946235913 or 234-8073356300 Charles N.O. Mordi Central Bank of Nigeria, Central Business District Garki, Abuja, Nigeria E-mail cnomordi@ Tel: 234-0946235900 or 234-8037851373 ESTIMATING SMALL SCALE MACROECONOMETRIC MODEL (SSMM) FOR NIGERIA: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE) APPROACH ABSTRACT This paper attempts to develop a small scale macroeconometric model for the Nigerian economy using dynamic stochastic general equilibrium (DSGE) methodology. Particular attention is paid to using impulse responses to explain the dynamic properties of the model. This model incorporates expectation as an anchor in the forward-looking monetary policy objective of the Central Bank of Nigeria (CBN). It captures most of the channels through which policymakers believe monetary policy can influence a small open economy with a managed floating exchange rate. The model was taken to the data by means of Bayesian estimation with the following major findings. First, although inflation holds forward-looking component, the backward-looking one is substantial. Also, income elasticity of the real demand for money in Nigeria is estimated to be 0.871, justifying the high volume of day-to-day transactions that use cash. Moreover, the paper identifies the existence of exchange rate pass-through, confirming the import-dependent nature of the Nigerian economy. Also, the paper estimates a sacrifice ratio of 1.306. Lastly, the paper shows that the best Taylor-type policy rule for Nigeria is to focus on a monetary policy rule that gives higher weight to inflation gap than output gap. JEL Classifications: E32, C51 Keywords: DSGE Model, Bayesian Estimation, Nigeria, Structural Model 1 INTRODUCTION Small Scale Macroeconometr