The Dynamic Interaction Between Fiscal Deficit and Inflation in Nigeria

Evidence from ARDL Bounds Test

Abstract

This study analysed the dynamic relationship between fiscal deficit and inflation in Nigeria from 1981 to 2024, with the aim of examining the link between these two macroeconomic variables. Economic indicators, including GDP growth, CPI inflation, fiscal deficit as a ratio of GDP, and exchange rate, were utilised in the analysis. Augmented Dickey–Fuller (ADF) and Phillips–Perron unit root tests were conducted to determine the order of integration of the variables. The results indicated that all variables were stationary at first difference, and the Auto-Regressive Distributed Lag (ARDL) bounds test was applied to investigate the short-run and long-run relationships between the variables of interest. The findings revealed that, in the long run, there was a positive but statistically insignificant relationship between fiscal deficit and inflation in Nigeria. Based on these findings, it was recommended that policymakers adopt fiscal and monetary discipline and moderate deficit financing to avoid persistent inflationary pressures that could negatively affect the purchasing power of Nigerians.