External Finance Premium and Macroeconomic Outcomes in Nigeria

Abstract

We develop a small open economy Dynamic Stochastic General Equilibrium model with financial frictions to emphasize the effects of credit market imperfections on macroeconomic outcomes in Nigeria. Financial frictions appear because of the existence of an agency problem that exposes entrepreneurs to high external finance premium. Findings demonstrate that financial frictions matter in the sluggishness of economy activity in Nigeria. Financial constraint lowered GDP level only by 10 percent in presence of domestic shocks, contrast to 30 percent in presence of foreign shocks. Furthermore, monetary policy can create pace to ease access to finance with end of fostering economy activity.

Keywords: External Finance Premium, Macroeconomic Outcomes, DSGE Model, Nigeria

JEL Classification: C61, D58, E44, F41