Modeling Fiscal-Monetary Policy Interaction in Nigeria

Abstract

This paper offers an analytical description of the nature of interaction between fiscal and monetary policy in Nigeria. It seeks to model how policymakers’ preferences and loss functions as well as other underlying economic fundamentals and processes influence economic policy outcomes. Using a game theoretical framework, the study reveals that misalignment of policy instruments and strategies, particularly fiscal dominance over monetary policy is the major factor responsible for the ineffectiveness of economic policies in Nigeria. However, a framework that provides for an optimal threshold that synchronizes the policy preferences of the policymakers will result into an optimal solution that could improve the interaction between fiscal and monetary policy in Nigeria.