Monetary–Fiscal Policy Effectiveness and Nigeria's Economic Growth: A Governance-Augmented Bayesian New Keynesian Dynamic Stochastic General Equilibrium Model Approach

Nigeria’s macroeconomic instability persists despite increasingly sophisticated policy frameworks, raising the question of whether governance quality systematically impairs policy transmission. This thesis addresses that question with a DSGE framework that embeds governance through two dynamic channels: a governance-TFP process affecting aggregate productivity, and a rent-seeking process diverting government spending from productive use. The model is estimated by Bayesian methods on annual Nigerian data spanning 1962–2023, with nine observables and 41 estimated parameters.The estimation confirms that structural constraints fundamentally shape policy transmission. The non-Ricardian household share (λ = 0.881) implies that approximately 88 per cent of households cannot smooth consumption through financial markets, attenuating conventional monetary channels. The Central Bank of Nigeria’s policy rule satisfies the Taylor principle (inflation coefficient 1.795) and responds significantly to exchange-rate movements, consistent with the managed-float regime. Governance shocks are highly persistent (𝜌𝜉 = 0.772, 𝜌𝜌 = 0.729), indicating deep institutional inertia.The central empirical finding is the quantitative dominance of governance in macroeconomic volatility. Governance-TFP shocks account for 76.8 per cent of real-exchange-rate variance and rent-seeking shocks for 23.5 per cent of government-spending variance: two findings without precedent in the developing-economy DSGE literature. Conventional shocks dominate elsewhere; technology and monetary policy shocks together drive 88.5 per cent of output variance, and monetary-policy shocks account for 57.6 per cent of inflation variance, confirming that the governance channels capture institutional dynamics rather than absorbing conventional-shock variance. The fiscal multiplier of 0.174 is low partly because rent-seeking diverts spending from productive use; the productive multiplier per unit of non-diverted expenditure is 0.227.Welfare analysis establishes a reform-sequencing hierarchy. The consumption-equivalent cost of severe governance failure relative to baseline is 16.6 per cent of permanent consumption, while moving from baseline to strong governance delivers a gain of 13.8 per cent; non-Ricardian households bear a disproportionate share of both outcomes. An optimised simple monetary rule achieves 91.9 per cent of the Ramsey welfare gain, while fiscal-rule optimisation yields only a modest additional improvement of around 10 per cent until rent-seeking is addressed. Governance reform must therefore precede or accompany conventional policy adjustments for stabilisation to succeed, providing quantitative benchmarks for the design and sequencing of institutional and macroeconomic reform.