EuroEconomica, Vol 36, No 2 (2017)

Abstract

This paper develpos and estimates a small open economy dynamic stochastic genral equilirium (DSGE) model for the Nigerian economy using the Bayesian technique. We include a number of frictions, rigidities and shocks in our model. The results show a considerable evidence of price stickiness in Nigeria. Furthermore, the results suggest that the forward-looking component dominates price setting behaviour in Nigeria. Moreover, the findings indicate that external shocks such as external debt, exchange rate and foreign inflation shocks largely influence output fluctuation in Nigeria while inflation is driven by money supply, productivity, nominal exchange rate and domestic interest rate shocks. Lastly, the findings indicate that the monetary authority responds strongly to real exchange rate shocks.