Fiscal Policy and Inflation in Nigeria: A Policy Impact Evaluation
Abstract
This study examines the impact of fiscal policy instruments on inflationary dynamics in Nigeria during the period 1992-2024. Employing an Autoregressive Distributed Lag (ARDL) framework within a Keynesian theoretical perspective, the research investigates the relationship between three key fiscal variables, tax revenue (TRT), public expenditure (PEX), and debt financing (DBT), and the Consumer Price Index (CPI) as a measure of inflation. The bounds test results indicate no long-run cointegration among the variables, prompting a focus on short-run dynamics. The empirical findings reveal that lagged inflation exhibits strong persistence with a coefficient of 0.84, while public expenditure demonstrates a statistically significant positive relationship with inflation (coefficient: 0.70). Although tax revenue shows a positive association with inflation (coefficient: 6.52), this relationship is not statistically significant. Debt financing displays a negative but statistically insignificant effect on inflation (coefficient: -0.20). The model explains 78% of the variation in inflation, with diagnostic tests confirming its adequacy and stability. These results suggest that expansionary fiscal policies, particularly through government spending, contribute to inflationary pressures in Nigeria's economy in the short run. The study recommends prioritizing capital expenditure over recurrent spending, expanding the tax base rather than raising rates, and directing debt financing toward productive sectors to enhance supply-side capacity and mitigate inflationary pressures.