An Assessment of the Nexus Between Government Expenditure and Inflation in Nigeria

Abstract

Abstract Research Background: The on-going debate concerning the exact relationship that exists between inflation and government expenditure especially in the long and short run prompted this research. Purpose: The study assesses the relationship between government expenditure and inflation in Nigeria. Apart from government expenditure and inflation rate, other variables such as exchange rate and money supply are included to ensure a robust model. Research Methodology: Secondary data from 1980 to 2017 were collected and analysed using the Johansen Cointegration analysis and vector error correction model. Results: The results showed that apart from the bi-directional relationship that exists between the variables, there exists a strong relationship between government expenditure and inflation rate and that a significant impact is sustained from the short run through the long run. The exchange rate and money supply also exhibit a strong association with government expenditure. Novelty: The study has underscored the importance of the inflation rate in Nigeria as it affects government spending by focusing more on inflation rather than the movement that was the focus of most of the previous studies. It has also shown the causality flow from both inflation and government expenditure, which hitherto remains contentious.