The Causal Relationship between Government Expenditure and Inflation in Nigeria: Smooth Transition Regression Approach

Abstract

This paper revisits the nexus between government spending and inflation in Nigeria using a Smooth Transition Regression model (STR) to investigate both the linear and nonlinear effects of the former on the latter from 2000: 1 to 2023:6. The monthly data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin (2023) are used. The study reveals that linear approximation fails to adequately explain the non-linear effects of government spending on inflation, particularly in high-growth regimes financed by the central bank. It is suggested that in a low-growth regime where government spending is not financed by the central bank, avenue should be given to fiscal policy to stimulate and control inflation.