Dynamic Stochastic General Equilibrium Approach on the Analysis of Monetary Policy Shocks on Economic Variables

Abstract

This study estimates a first-order Dynamic Stochastic General Equilibrium (DSGE) to examine the structural dynamics of macroeconomic variables in response to policy and external shocks within context of Nigeria. The model reveals significant intertemporal behavior, with a discount factor β of 0.51, indicating moderate forward-looking preferences among economic agents. Inflation responsiveness, captured by φ = 5.90, reflects a steep Phillips curve, suggesting inflation is highly sensitive to output fluctuations. Persistence parameters for structural shocks—ρu (0.70) and ρg (0.96)—highlight distinct dynamic properties: while cost or demand shocks exhibit temporary effects, government spending or productivity shocks display near-permanent influence. The policy matrix indicates that variable g (interpreted as fiscal or technological shock) exerts consistently strong positive effects on inflation, output, and interest rates, while u (cost or preference shocks) has opposing effects. It was confirmed that there exist asymmetric distributions of policy outcomes—platykurtic with positive skewness—suggesting a tendency toward expansionary policy. Impulse response analyses reveal that contractionary monetary policy shocks reduce and inflation temporarily, aligning with New Keynesian predictions. These findings offer critical insights for monetary authorities aiming to balance stabilization with growth in structurally dynamic economies.