A TEST OF THE FISCAL THEORY OF PRICE LEVEL: CASE STUDY OF NIGERIA

Moses K Tule,Usman Nuruddeen,Apinran O Martins,Oloruntoba S Ogundele

doi:10.32479/ijefi.8768

Abstract

The Paper tests the efficacy of fiscal theory of price level in Nigeria using an Auto Regressive Distributive lag (ARDL) model for the period from 2002Q1 to 2017Q4. The study seeks to test the hypothesis that of Leeper (1991) and Sim (1998) that the price level is not independently determined by the monetary authorities, rather it is as a result of the relationship between monetary and fiscal authorities. The Nigerian Federal Government has had to resort to continuous borrowing in order to meet its financial obligations. The size of the fiscal deficit has ballooned which if not controlled could worsen fiscal vulnerability and eventually lead to financial distress. We find that fiscal deficits have a positive and statistically significant effect on inflation in all models estimated, attributed to the high degree of fiscal dominance in Nigeria. Giving our findings, Nigerian economy needs to address the challenge of high fiscal imbalances.

Highlights

In general terms, the emphasis of macro-economic policy globally remains full employment, price stability, balance of payment equilibrium, exchange rate stability, economic growth and development. Fischer et al (2002) contends that the significance of inflation as a macroeconomic phenomenon in an economy and its impact on the wider economy has always been a hot debate among economists, policy makers, investors and monetary policy authorities.In particular, the developing countries including Nigeria have attracted special attention on fiscal view of inflation as a result of general notion that inefficient tax collection, political instability and limited access to external borrowing are predominant challenges of developing nations
Where CPI is the log of consumer price index which is used to measure the level of inflation; FD is the log of fiscal deficit; Trade is the log of degree of trade openness; PLR is the prime lending rate; ER is the log of exchange rate
From the Augmented Dickey fuller (ADF) unit root test result above, all the variables are integrated at order 1(1) which paves the way for the use of the autoregressive distributed lag (ARDL) bounds testing procedure to test for long-run relationship

Summary

INTRODUCTION

The emphasis of macro-economic policy globally remains full employment, price stability (control of inflation), balance of payment equilibrium, exchange rate stability, economic growth and development. Fischer et al (2002) contends that the significance of inflation as a macroeconomic phenomenon in an economy and its impact on the wider economy has always been a hot debate among economists, policy makers, investors and monetary policy authorities. In most developing and emerging market economies, more money is printed through the central bank to finance deficit by Nigeria as an emerging market is suitable for the study of fiscal deficit–inflation nexus, because over the last decade, the monetary authority has continually attributed the rising inflationary presence partly to excessive borrowing to finance budget Even though this area has gained scanty attention among researchers, more studies have emphasized inflation as a monetary phenomenon (Ujiju and Etale (2016), Gbadebo and Mohammed (2015)). Section four discusses the empirical results while section five concludes with policy recommendation

LITERATURE REVIEW

DATA AND METHODOLOGY

ESTIMATION AND RESULTS

CONCLUSION AND POLICY RECOMMENDATIONS