Does Fiscal Deficit Granger Cause Instability in Inflation Rate in Nigeria: A Bivariate Causality Approach?

Abstract

This study examines the direction of causality between fiscal policy and inflation volatility in Nigeria for the periods 1981 to 2014. Secondary quarterly time series data on fiscal deficit and consumer price index (measure of inflation rate) from 1981:1 to 2013:3 were used for the study and obtained from the central bank of Nigeria statistical bulletin 2014 while the volatility data is generated through GARCH method. The data collected was analyzed using the Pairwise Granger Causality Test. The findings of the study show that there is bi-directional causality between fiscal deficit ( 15F-statistic=5.86 & 3.96;P<0.05) ">  and inflation volatility. Thus, volatility in inflation rate is traceable to the persistent nature of the excess government expenditure over revenue of the Nigerian economy and vice versa. The study therefore recommends that appropriate policies should be put in place to check the extra budgetary expenditure of the government since they have been found to be inflationary and also, excess supply of money that results in inflation should as well be controlled by the government to prevent artificial inflation rate that could cause increase in expenditure.

Keywords: Inflation Volatility, Fiscal Deficit, GARCH, Bivariate Granger Causality Test

JEL Classification: E 31, E62