Empirical Investigation of Fiscal deficits and Inflation in Nigeria

Abstract

The study examined the relationship between inflation and fiscal deficits in Nigeria. Annual time series data spanning 42 years on inflation, fiscal deficits, agriculture, money supply and gross domestic product were sourced from central bank statistical bulletin special edition 2008 and volume 23 of 2012. The study applied unit-root test for stationary test, cointegration, Granger causality and error correction regression analysis. CUSUM and CUSUMQ statistics test was adopted for stability of the model. The study found out that fiscal deficits had a long run equilibrium relationship with inflation. The causality test showed a unidirectional relationship that run from fiscal deficits to inflation. The error correction model estimate reveals that fiscal deficits exert positive pressure on inflation. It was also discovered that the speed of adjustment of the dynamic short run process to long run equilibrium was very slow. The CUSUM and CUSUMQ test revealed that the model is stable. A fiscal management process that encourages increase revenue and reduction of external debt as well as a high practice of transparency in financial obligation will reduce the level of inflation; moreover, increase production of agricultural goods will retard the growth rate of inflation in Nigeria.  

Key Word: fiscal deficits, inflation, money supply, agriculture, econometric tools, Nigeria.