Fiscal Policy and Macroeconomic Stability in Nigeria: Evidence from Dynamic Regression Models

Abstract

Fiscal policy is widely regarded as a central instrument of macroeconomic management, yet its short-run relationship with stability outcomes in oil-dependent, low-income economies remains empirically unsettled. This study examines the effect of fiscal policy on macroeconomic stability in Nigeria using annual data covering 1990 to 2025. Macroeconomic stability is disaggregated into three indicators real GDP growth, the annual change in inflation, and exchange-rate volatility rather than treated as a single composite outcome. Fiscal policy is represented by the annual log growth of tax revenue and public debt, with changes in the interest rate, foreign direct investment, and the exchange rate included as controls. Three short-run dynamic regression models are estimated by ordinary least squares following unit-root testing, and reported with heteroscedasticityconsistent (HC3) standard errors after diagnostic testing. The results show that tax-revenue growth and public-debt growth are not jointly significant at the 5 percent level in any of the three models, while lagged GDP growth is a strong and statistically significant predictor of current growth, pointing to substantial persistence in Nigeria's growth process. Diagnostic tests reveal heteroscedasticity in the inflation model and non-normal residuals in the growth and exchange-rate-volatility models, both of which are accommodated through robust inference. The findings suggest that, within a short annual macroeconomic series, fiscal variables alone provide limited independent explanatory power for stability outcomes in Nigeria, and that broader structural and external factors are likely to dominate short-run dynamics. Implications for fiscal policy design and macroeconomic management are discussed.