INTERACTIONS BETWEEN FISCAL BALANCE AND MONETARY VARIABLES IN NIGERIA
Shehu El-Rasheed, PhD , Umar Muhammed, PhD, Yerima Gimba Alhassan, Mohammed Inuwa Dauda, PhD and Hassan Yusuf Abdulwahab, PhD
Volume 7 Issue 1
Abstract
This paper investigates the relationship between fiscal balance and key monetary variables viz; inflation, interest rate, money supply and exchange rate over the period 1980-2019. It first tests the series for unit root using the Augmented Dickey-Fuller (ADF) and Phillip Perron (PP) unit root tests. The long run and short run dynamic interaction between the fiscal balance and monetary variables was carried out using the ARDL bound test technique of Pesaran et al. (2001). The results indicate that interest rate, money supply and exchange rate all have influence on the fiscal balance. While interest rate and money supply affects fiscal balance negatively, domestic currency`s exchange rate has a positive effects on fiscal balance. Inflation affects fiscal balance in the short run period. The short run effect does not extend into the long run. Thus, the results indicates that a deterioration of monetary variables in Nigeria has a powerful and significant effect on the country`s fiscal balance. The implication of the study is that government should consider long term fiscal consolidation in the conduct of monetary policy.
Download Paper