The Nexus between Budget Deficit and Inflation in the Nigerian Economy (1980 – 2009)

Abstract

This study examined whether budget deficit is inflationary or not in Nigeria within the period of 1980-2009. The study made use of time series data and employed vector Error correction Mechanism (VECM) to determine the correlation that existed between the two macroeconomic variables. The study also investigated the existence of long run relationship between budget deficit and inflation. The result showed a significant causal relationship from budget deficit to inflation while the causal relationship from inflation to budget deficit was insignificant. This implies that a uni-directional causality from budget deficit to inflation exist in Nigeria. This result shows that budgets deficit affect inflation directly and indirectly through increase in money supply in the Nigerian economy. Adequate monetary policy should be geared towards balancing the role money supply performs to both budget deficit and inflation, noting that there was uni-directional relationship between budget deficit and inflation.

Keywords: Budget Deficit, Inflation, Causality, Nexus