Macroeconomic Determinants of Inflation: Are Monetary and Fiscal Policies the Right Combination to Fight Inflation in Nigeria?

Abstract

Around the world there is growing inflation since the emergence of COVID-19 and the start of Russia-Ukraine war. The COVID-19 has affected production of goods and services leading to scarcity around the world. Both Russia and Ukraine are very important in the supply of food and energy in the world. The start of war between the two countries has led to cut in the supply of food and energy around the world. This paper analyses the major determinants of inflation in Nigeria during the period 1989 to 2022. It employed cointegration analysis, granger causality test and correlation test for the analysis. It analysed the impacts of the following factors on inflation in Nigeria: money supply, foreign debt, interest rate, exchange rate, import, export, foreign direct investment (FDI) and government expenditure. The results of the study show that inflation in Nigeria during the period of the study is as a result of monetary and fiscal policies defects; especially government’s interest rate and import policies. But, during the short run the main determinants of inflation have not much effect on inflation. In order to fight the menace of inflation in Nigeria, both the CBN and the ministry of finance must join hands to fight it. Only by coordination between monetary and fiscal authorities will the problem of inflation be controlled effectively.