Article DetailsArticle Details

An Assessment of the Relationship between Fiscal Policy Shocks, Foreign Aids and Nigeria Economy

An Assessment of the Relationship between Fiscal Policy Shocks, Foreign Aids and Nigeria Economy

Published October 24, 2018

Author Details


The relationship between fiscal policy shocks and Official Development Assistance ODA which is a proxy for Foreign Aids and their effects on the growth of the Nigerian economy has been a subject of debate for some times in among economic researchers. However, lack of consensus on this issue is one of the major reasons that prompted this study. The study used the vector autoregressive analysis (VAR)for its estimations. The VAR model identified oil price and exchange rate as the major external shock to fiscal policy in Nigeria, therefore they are both treated as exogenous variables. Also, government revenue and expenditure are identified as major fiscal policy shocks, while foreign aids act as transmission mechanism of the effect of the shocks to output (GDP) which is a proxy for economic growth. The results show that foreign aids in Nigeria are more responsive to external shocks (oil price and exchange rate) than the fiscal policy shocks. Both oil price shock and government revenue shocks are significant in determining the behaviour of the GDP. However, government revenue and expenditure shocks fail to have a commensurate positive effect that the oil price has on them and the GDP.


Official Development Assistance, Fiscal Policy Shocks, Foreign Aids, Nigerian Economy


Aghion, P. and Howitt, P. (1992) A model of growth through creative destruction. Econometric Society,60(2), 323–351.

Agosin, M. and Machado, R. (2005) Foreign investment in developing countries: Does it crowd in domesticinvestment? Oxford Development Studies,33(2), 149–162.

Aitken, B.J. and Harrison, A.E. (1999) Do domestic firms benefit from direct foreign investment? Evidence fromVenezuela? American Economic Review,89(3), 605–618.

Ajide, B. and Adeniyi, O. (2010). FDI and the Environment in Developing Economies: Evidence from Nigeria.Environmental Research Journal, 4(4), 291-297.

Fasanya, A. and Onakoya, B. (2012) Impact of foreign aid on Nigeria.American EconomicReview ,92(4),1126–1137.

Bauer, P.T. (1972) Dissent on Development. Cambridge, MA: Harvard University Press.

Bauer, P. T. (1991). The Development Frontier: Essays in Applied Economics. Cambridge, MA: HarvardUniversity Press.

Bender, D. and Lӧwenstein, W. (2005). Two-Gap Models: Post-Keynesian Death and Neoclassical Rebirth.Institute of Development Research and Development Policy. IEE Working Papers No. 180.

Ghulam, M (2005) Foreign aid and economic development in Pakistan. Economic Development and Cultural Change,52(2), 255–285.

Feeny, C. (2003) Aid, policies, and poverty in Papua, New guinea. American Economic Review,90(4), 847–868.

Chaehery, H. and Strout, A. (1956). Foreign Assistance and Economic Development. American Economic Review, 56(2), 213-217

Chenery, H. and Adelman, I. (1966). Foreign Aid and Economic Development. RES, 48(3), 314-329.

Chenery, H. and M. Bruno (1962). Development Alternatives in an Open Economy. Economic Literature, 72(3), 516-547.

Christopher, K. (2004), Aids and Regulation. Vessar College Economics Working Paper No. 65

Dickey, D.A and Fuller, W.A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association, 74(1), 427- 431.

Elbourne, A. (2007). The UK housing market and the monetary policy transmission mechanism: An SVAR approach. Journal of Housing Economics, 17 (8), 65-87.

Fève, P., &Guay, A. (2006). The response of hour to technology shock: SVAR approach. Money Credit bank ,5(1), 958-1103.

Ibrahim, H.,M., & Amin, M., R. (2005). Exchange rate, monetary policy and manufacturing output in Malaysia. Journal of Economic Cooperation, 26(3), 103-130.

Kolawole, B.O. (2013). Foreign assistance and economic growth in Nigeria: The two-gap model framework .American International Journal of Contemporary Research, 3(10), 1-12.

Mordi, C.,N.,O., &Adebiyi, M.,A. (2010). The Asymmetric effects of oil price shocks on output and prices in Nigeria using a structural VAR model. Centarl Bank of Nigeria Economic and Financial Review. 48(1), 1-32.

Ngalawa, H., &Viegi, N. (2011). Dynamic effects of monetary policy shocks in Malawi. South African Journal of Economics, 79(3), 244-250.

Okon, E.O. (2012). Five Decades of Development Aid to Nigeria: The Impact on Human Development. Journal of Economics and Sustainable Development, 3(1),I222-1700

Olomola, P. (2007). Oil wealth and economic growth in African oil exporting countries.AERC research paper, No. 170.

Peersman, G., &Smet, F. (2002). The industry effects of monetary policy in the Euro-Area. European Bank Working Paper No. 65.

Uhlig, H. (2005). What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics, 52(6), 381–419.

Vonnak, B. (2005). Estimating the effects of Hungarian monetary policy within a structural VAR framework. Magyar Nemzeti Bank Working Paper Series, No 37.

Zafar, I. (1997) Impact of foreign capital inflows on government’s fiscal behaviour in Pakistan Contemporary studies in Economic and financial Analysis, 9(1), 3-12.

to our newsletter

to our newsletter