Effect of Government Expenditure on Inflation in Nigeria

Abstract

This study examined the effect of government expenditure on inflation in Nigeria while disaggregating expenditure into capital and recurrent. The study also examined the response of inflation to changes in government expenditure in Nigeria. Secondary data collected from the Central Bank of Nigeria Statistical Bulletin was employed for a period of thirty-eight years (i.e. 1981-2019). The Auto Regressive Distributed Lag technique was employed. For the first model explaining government capital expenditure, short run estimates reveal that in the current period, government capital expenditure has a significantly negative relationship with inflation. For government recurrent expenditure, it was established that government recurrent expenditure has a positive relationship with inflation. The impulse response test used in analyzing the effect of an unanticipated change in government expenditure (capital and recurrent) on inflation shows that the effects of the change in both cases are temporary as they are seen to revert to the mean. The study recommends that the government should maintain a good strategic balance between capital and recurrent expenditure to prevent the economy from being consumption - based.