Does government spending undermine monetary policy in Nigeria?

Abstract

In Nigeria, anecdotal evidence suggest that the fiscal/operations of government, especially disbursements from the Federation Account to the three-tiers of government, had over the years created liquidity challenges requiring aggressive monetary management. Against the background, this paper addresses two questions: (i) Does government spending have significant spill-over effects on inflation in Nigeria? (ii) Does government, spending induce a concomitant response by the CBN? ln addition, unlike the sparse literature in Nigeria on these two issues, which essentially relies on constant parameter model we use of time-varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. Applying this framework allows us not only to identity the general relationship between the variables of interest; it also permits us to understand the dynamics of these variables over time in line with the underlying macroeconomic structure of the economy. The posterior estimates of the means show that the response of inflation government spending shock was relatively stable for the period prior to 1990 over the estimation sample. A tendency to elevate prices became pronounced became more and 2011. Concomitantly, short-term interest role (prime lending rate) had shown greater variability in terms of its response lo government expenditure shocks in the period 1991 to 2011 as in the case of inflation