A Trivariate Causality Test among Economic Growth, Government Expenditure and Inflation Rate: Evidence from Nigeria

Abstract

This study examined the causal relationships among economic growth, government expenditure and inflation rate in Nigeria over the period 1970 to 2010. The study utilized both the Augmented Dickey-Fuller (ADF) and the Philip Perron tests to examine the properties of the variables. It was observed that the variables were found to be stationary, though not in their level form but in their first difference. In addition, the Johansen and Juselius (JJ) co-integration technique indicated the presence of co-integration among the variables while the tri-variate vector error correction model (VECM) showed the presence of bi-directional causality between government expenditures and economic growth both in the short run and in the long run. Also, it was revealed that in the short run a unidirectional causality existed from economic growth and government expenditure to inflation rate while no feedback from inflation rate was observed. Based on these findings, this study recommends that government should implement policies that would moderate government spending in order to reduce inflation rate. To compliment for the loss in economic growth through the reduction in government spending, lending rate should be moderated to encourage private investment in the Nigerian economy.

Keywords: Economic growth, Government Expenditure, Inflation Rate, Trivariate Causality, VEC Model