The Inflation – Expenditure Relation: Macrofinametric Evidence from Nigeria

Abstract: It is the objective of this study to investigate the relationships between the various aspects of government expenditure, namely capital and recurrent expenditure, and the macroeconomic variable – inflation based on the Nigerian evidence. The study employed the Generalized Method of Moments method to estimate the short-run relationship while use was made of the Unrestricted Cointegration Rank Tests (Trace and Maximum Eigenvalue) after the order of linear deterministic trend to estimate the long-run relationship. The results indicate that there exist one cointegrating equation and a sustainable long run equilibrium relationship between the inflation and the government expenditure variables. In the short-run, there is a positive and significant relationship between inflation and recurrent government spending. On the other hand, the relationship between inflation and capital expenditure is not statistically significant. Evidently, the result indicates that capital expenditure is not a significant inflation driver in Nigeria, but recurrent expenditure is. Thus the advocated policy action is for the Nigerian government to pursue a policy of increasing capital expenditure relative to recurrent spending. This would increase output and reduce pressure on aggregate prices.

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Authors: Chinedu B. Ezirim, Daniel Eniekezimene, Azuka E. Amuzie, Nneka Charles-Anyaogu