Impact of Fiscal Policy on Inflation in Nigerian Economy

Abstract

This paper examines the impact of fiscal policy on inflation in Nigeria for the period 1981-2021. The study adopts autoregressive distributed lag (ARDL) bounds testing approach. The unit root results revealed that other variables apart from inflation were stationary after first difference. The bound test result shows that the variables cointegrate. The ARDL long-run result shows that oil revenue has a negative significant impact on inflation, while government recurrent expenditure and capital expenditure have positive impact on the inflation, with the impact of recurrent expenditure significant. The results further showed that the impacts of oil revenue, recurrent expenditure, and capital expenditure in long-run was also maintained in the short run. Lastly, exchange rate and total imports have negative impact on inflation, while foreign direct investment inflow has a positive impact on inflation in both long- and short-run. The government should review her fiscal policy to adjust recurrent and capital expenditure, and to reduce import by encouraging consumption of local products.