The impact of fiscal and monetary policy on unemployment rate in Nigeria (1981-2020)

Abstract

Chinonye Emmanuel Onwuka

This study empirically examined the impact of fiscal and monetary policy on unemployment rate using data between the periods 1981 to 2020 by the use of Vector Autoregressive (VAR) model as the major statistical technique of analysis. The data used for the study were annual time series secondary data sourced from Central Bank Statistical Bulletin(CBN) and National Bureau of Statistics (NBS). From the findings, the coefficient of determination (R2) is 0.652 which shows that about 65 percent variations in the unemployment rate were explained by the independent variables. Also, its adjusted counterpart is 0.602 and its shows that about 60 percent growth in unemployment rate can be explained by the independent variables. The unit root test results indicated that all the variables were stationary at first difference and co-integration test confirmed a long run relationship among the variables. The F-stat value of 4.445 confirms that the overall test is significant. The AR root test confirms that the estimated model is stable. Also, the serial correlation LM test and heteroskedacity test confirm that there is no autocorrelation and heteroskedacity in the model.The findings show that government expenditure and interest rate has negative and significant effect on unemployment rate at lag period 2. Government tax was found to be negative and insignificant at lag period 2. Money supply was found to have a positive and significant at lag period 1. By implication, the findings showthat government expenditure, money supply and interest rate are major determinants of unemployment rate in Nigeria since they were found to be statistically significant. Also, the impulse response function of unemployment shows that unemployment rate that has a negative relationship with its past values from periods except in the first, 2nd, 3rd, 4th and 5th periods.Furthermore, from the forecast error variance decomposition (FEVD), it is obvious that the highest innovation was due to government tax and money supply, while the shock of government expenditure and interest rate in Nigeriawere the lowest over the periods. The study concludes that there is need for diverse strategies that will be targeted towards employment creation in Nigeria. Thus, an expansionary fiscal and monetary policy should be encouraged to support employment generation in the country.

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