An ARDL Approach to the Government Expenditure and Economic Growth Nexus in Nigeria

This study majorly aims at investigating the impact of government expenditure on economic growth by controlling FDI inflow as additional variable for the timeframe from 1981 to 2016. The inclusion of FDI inflow in the model become imperative because government spending policies especially in areas such as infrastructure play significant role in attracting potential investors (inflow of FDI) as closely linked to the work of Cristina, (2012) and Adeoye, (2007). Thus, the linear combination of these key macroeconomic variables is expected to drive economic growth appropriately. The traditional ADF and PP unit root tests were employed for the stationarity tests of the series in which both show a mixed order of I(1) and I(0). The dynamic ARDL test found that the variables in view equate in the long term at the speed of 30% and at 1% level of freedom. The findings further show that government expenditure asserts significant positive impact on economic growth both in the short-long run, while FDI effect is positive but insignificant in both terms. Furthermore, the pairwise granger causality revealed a unidirectional link which flows from economic growth to government expenditure in support of the Wagner’s law for the Nigeria economy, and a one way feedback from FDI to government expenditure, while a divergent interaction was revealed between FDI and economic growth. This study therefore suggests a possible way out which is to pursuit a strong and disciplined fiscal policy where her hard earned resources would be channel majorly to the productive sector with high returns and to ensure close monitoring. Finally, this study suggests that government should first focus on improving the absorptive capacity of the economy which will help trigger the spillover effects of FDI inflow into productive gains.