The threshold level of budget deficit and money supply that stabilize inflation in Nigeria

Abstract

This study evaluates the threshold level of budget deficit and money supply that stabilize inflation in Nigeria spanning 1986 and 2020. The study aimed at determine the threshold level of budget deficit and money supply that stabilize inflation in Nigeria. In Addition, the study applied the Hansen threshold model (1998) to estimate the threshold level. 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. 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. The study therefore recommends that government must ensure that yearly budget imbalance does not exceed this threshold in order to mitigate deficit induce inflation. Also, there is the need for government to strengthening public financial management reforms (like Fiscal Responsibility Act, the Medium-Term Expenditure Framework). This will engender fiscal discipline and reduce fiscal deficit over time.