Public Expenditure Growth and Inflation in Nigeria: The Causality Approach

Abstract

The paper examined empirically the causal relationship existing between public expenditure growth and inflation in Nigeria from 1981 to 2012. Employing modern time series econometric techniques such as; Augmented Dickey-Fuller (ADF) Unit Root test, Johansen Co-integration test and the Granger Causality test. The Augmented Dickey-Fuller (ADF) for unit root test shows that two of the variables excluding INFL were not stationary at level but became stationary at first difference and the Johansen cointegration technique indicated the presence of co-integration among the variables. The study provides evidence that there is no statistically discernible relationship between government expenditure growth and inflation in Nigeria. we therefore, kick against the ‘old-time religion’ of restricting aggregate demand by tight monetary policy as often demonstrated by the Central Bank of Nigeria through adjustments in the Monetary Policy Rate (MPR), but we rather advocate a relaxation of the MPR with the necessary adjustments when necessary as inflation is occasionally necessary to jump-start an economy that is floundering.