Macroeconomic Volatility and Government Consumption Expenditure: Implication for Public Welfare: A Dynamic Macroeconometric Stochastic Model

This paper addresses the effects of macroeconomic volatility on government consumption expenditure (GCE) in Nigeria well as the burdens and challenges it has been imposing on public welfare. Methodologically, a dynamic macroeconometric stochastic model was used to analysis the nature of the impacts, where GCE is presumed to depend upon changes in various indicators of macroeconomic performances. We empirically mode the relationship between GCE and the macroeconomy with a hybrid model that employs a reduced form coefficients of simultaneous equation models, to capture the dynamic interactions among the data and a structural economic model to describe the contemporaneous relationship between the variables. The Structural Auto-Regression (SVAR) process including the GCE, real exchange rate, general price level (inflation rate), unemployment rate and debt service obligation, is estimated over the period 1980-2008. The model ascertained the extent in which volatility of the macroeconomics does lead to a decline in GCE. We find that, the GCE response to structural one innovation appears to be greater in inflation than other endogenous and exogenous variables that is, an economic shock to inflation effect is stronger on the GCE at longer horizon. Also, inflation innovations play a larger role in explaining GCE forecast error variance in the short run than they do in the long run and this generates negative net effects on public welfare in the short run than long run.