Comparative Analysis of Markov Switching and Dynamic Stochastic General Equilibrium (DSGE) Models in Evaluating Monetary Policy Shocks in Nigeria
Ntul, A E Essi, I D, Nafo, N M
Abstract
This study provides a comparative analysis of the Markov Switching and Dynamic Stochastic General Equilibrium (DSGE) models in assessing the dynamic effects of monetary policy shocks on macroeconomic variables in Nigeria. Using quarterly data from 1990 to 2023 obtained from the Central Bank of Nigeria (CBN) and the World Bank, both models were estimated to examine how inflation, output, interest rate, and unemployment respond to policy-induced disturbances. The DSGE model captures structural relationships and forward-looking behavior but assumes constant regimes, while the Markov Switching model identifies regime dependent transitions that reflect Nigeriaβs volatile macroeconomic environment. Results show that contractionary policy shocks exert stronger and more persistent effects under DSGE settings, whereas the Markov model uncovers asymmetries between high- and low-inflation regimes. The integration of regime- switching dynamics within the DSGE framework improves predictive performance and enhances policy relevance. The study concludes that adopting a hybrid DSGE Markov modeling approach offers a more robust tool for evaluating the transmission of monetary policy shocks in developing economies like Nigeria.
Keywords
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