FISCAL POLICY COMPOSITION AND INFLATION PERSISTENCE IN NIGERIA
Adegoke Samson Adewale , Ajidani Sabo Moses, PhD and Henry Ahmed Eggon, PhD
Volume 13 Issue 1
Abstract
This study examines the role of fiscal policy composition in explaining inflation persistence in Nigeria using annual time-series data spanning 1990–2024. Departing from the conventional emphasis on monetary factors, the study focuses on how different fiscal instruments shape inflation dynamics over time. Inflation is modelled alongside key fiscal variables, government expenditure, taxation, transfer payments, and public debt within a Vector Autoregressive (VAR) framework. Preliminary tests confirm that all variables are integrated of order one, and the Johansen cointegration test reveals the existence of a long-run equilibrium relationship among inflation and fiscal policy components. The empirical analysis relies on forecast error variance decomposition (FEVD) to assess the relative contribution of fiscal variables to inflation variability across different horizons. The results indicate that inflation is largely driven by its own innovations in the short run; however, fiscal variables become increasingly important over longer horizons. In particular, government expenditure accounts for approximately 18 per cent of inflation variance in the long run, while transfer payments explain about 12 per cent, highlighting the dominant role of expenditure-side fiscal policy in sustaining inflationary pressures. By contrast, taxation contributes less than 10 per cent to inflation variance across all horizons, reflecting structural weaknesses in revenue mobilisation, while public debt exerts a modest but rising influence over time, consistent with an expectations-based transmission mechanism. Overall, the findings provide strong evidence that inflation persistence in Nigeria is closely linked to fiscal policy behaviour, especially expenditure and transfer programmes. The study underscores the importance of disciplined and composition-sensitive fiscal management for achieving long-term price stability. Keywords: Inflation persistence; Fiscal policy composition; Government expenditure; Transfer payments; Public debt; Vector autoregression; Nigeria
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