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A Test of the Fiscal Theory of Price Level: Case Study of Nigeria

Author

Listed:
  • Moses K. Tule

    (Department of Monetary Policy, Central Bank of Nigeria, Abuja, Nigeria.)

  • Usman Nuruddeen

    (Department of Monetary Policy, Central Bank of Nigeria, Abuja, Nigeria.)

  • Oloruntoba S. Ogundele

    (Department of Monetary Policy, Central Bank of Nigeria, Abuja, Nigeria.)

  • Apinran O. Martins

    (Department of Monetary Policy, Central Bank of Nigeria, Abuja, Nigeria.)

Abstract

The Paper tests the efficacy of fiscal theory of price level in Nigeria using an Auto Regressive Distributive lag (ARDL) model for the period from 2002Q1 to 2017Q4. The study seeks to test the hypothesis that of Leeper (1991) and Sim (1998) that the price level is not independently determined by the monetary authorities, rather it is as a result of the relationship between monetary and fiscal authorities. The Nigerian Federal Government has had to resort to continuous borrowing in order to meet its financial obligations. The size of the fiscal deficit has ballooned which if not controlled could worsen fiscal vulnerability and eventually lead to financial distress. We find that fiscal deficits have a positive and statistically significant effect on inflation in all models estimated, attributed to the high degree of fiscal dominance in Nigeria. Giving our findings, Nigerian economy needs to address the challenge of high fiscal imbalances.

Suggested Citation

  • Moses K. Tule & Usman Nuruddeen & Oloruntoba S. Ogundele & Apinran O. Martins, 2019. "A Test of the Fiscal Theory of Price Level: Case Study of Nigeria," International Journal of Economics and Financial Issues, Econjournals, vol. 9(6), pages 67-76.
    • Handle: RePEc:eco:journ1:2019-06-8
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    References listed on IDEAS

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    1. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
    2. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    3. Ahking, Francis W. & Miller, Stephen M., 1985. "The relationship between government deficits, money growthm and inflation," Journal of Macroeconomics, Elsevier, vol. 7(4), pages 447-467.
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    Cited by:

    1. Olusola Joel Oyeleke, 2021. "On the Non-Linear Relationship between Fiscal Deficit and Inflation: The Nigeria Experience," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 27(2), pages 105-117, May.
    2. Johnbosco Chukwuma Ozigbu, 2023. "Responsiveness of Headline Inflation to the Dynamics of Monetary Aggregates in Nigeria: A Structural Vector Autoregressive (SVAR) Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(9), pages 1701-1711, September.

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    More about this item

    Keywords

    Fiscal Deficits; Inflation; Nigeria.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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