Fiscal Deficit and Inflation in an Oil Rich Exporting Country: Evidence from Nigeria

Abstract

This research work examined the long run relationship between fiscal deficit and inflation in Nigeria as well as the effect of fiscal deficit on inflation covering a time frame of 1981 to 2015. Data sourced from Central Bank of Nigeria statistical bulletin were diagnosed for heteroskedasticity, serial correlation, Ramsey Reset and multicollinearity. We exercised econometric tools such as unit root, Johansen co-integration, Granger causality and Vector Error Correction Model to achieve the aim of the study. Johansen co-integration established that there is a long run relationship between fiscal deficit and inflation in Nigeria as evidenced on the trace and maximum eigenvalue depiction of two co-integration equation each at 5% level of significance. The granger causality impact assessment result showed fiscal deficit does not significantly influence inflation in Nigeria. In view of the fact that fiscal deficit does not play down inflationary trend in Nigeria, this study recommends that deficit financing by government should be discontinued with and reduction in fiscal deficit capable of keeping government spending at sustainable limits be upheld.