The asymmetry effect of budget deficit and inflation in Nigeria

Abstract

This study evaluates the asymmetry effect of budget deficit and inflation in Nigeria spanning 1986 and 2020. The dissertation employed the Non-linear Autoregressive Distributed Lag (NARDL) approach of Shin, Yu and Greenwood-nimmo (2014) to examine the effect of budget deficit on inflation in Nigeria. The study employed annual data on budget deficit (proxied by budget deficit as a share of GDP), money supply (proxied by money supply), inflation (proxied by consumer price index) collected from Central Bank of Nigeria Statistical Bulletin, 2020 edition. The result of the effect of budget deficit on inflation indicates that in the long run, positive change in budget deficit induces inflation. This result indicates that rise in budget deficit is inflationary in Nigeria. Furthermore, the inflationary role of positive change in budget leads to higher price level. In addition, a negative change in budget deficit exerts an inflationary pressure in the long run though insignificant. Based on the findings of our analyses, the study concludes that budget deficit raises money supply and induces inflationary pressure in Nigeria. The study therefore recommends that there is need for the authorities in Nigeria should reduce the cost of governance by reducing overhead and allowance of political office holder in order to reduce budget deficit.