Institutional Capacity and Macroeconomic Performance: Empirical Evidence from Nigeria

Abstract

The paper aimed at empirically investigating the impact of institutional capacity on
macroeconomic performance of the Nigerian economy for the period 1961-2011. The
analysis is based on a multivariate vector error correction model. The empirical results
confirm co-integration relationship between institutional capacity, fiscal-monetary policy mix
and macroeconomic performance. Results of the generalized impulse response functions
suggest that one standard deviation innovation on institutional capacity reduces
macroeconomic performance in the short, medium and long term, while results of the
variance decomposition indicate that a significant variation in Nigeria’s macroeconomic
performance is not attributable to changes in the capacity of institutions, based on the proxy
employed. It is recommended that for macroeconomic performance to be improved and
sustained, mechanisms which deliberately seek to enhance institutional capacity, with a view
to stimulating growth and providing the impetus for the achievement of macroeconomic
objectives in the short, medium and long term horizons be instituted and vigorously pursued.