Fiscal deficits and inflation dynamics in Nigeria an empirical investigation of causal relationships

Abstract

Government expenditure in Nigeria has consistently exceeded revenue for most of the years beginning from 1980. This paper investigates the causal relationship between inflation and fiscal deficit in Nigeria from 1970 to 1994. It was empirically confirmed that although fiscal deficit causes inflation, there was no feedback between inflation and fiscal deficit. However the findings showed that feedback existed between inflation and fiscal deficit deflated by the GDP. The Structural model of inflation revealed that, it takes about two years for the fiscal deficit to impact on inflation in Nigeria. The study concluded that what should be of paramount concern -to policy makers as regards inflation should not so much be the level of fiscal deficits but the sources of its financing as well as the absorptive capacity of the economy. Thus, policies to tame inflation should have inbuilt ability to increase the productive capacity of the economy.