Impact of Fiscal Policy on Inflation Expectations in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue V, May 2019 | ISSN 2454–6186

Impact of Fiscal Policy on Inflation Expectations in Nigeria

Asemota Georgina (Ph.D)^1*, Dibie, Kashiari Esther (Ph.D)²

¹Department of Economics, Benson Idahosa University, Benin City, Edo State, Nigeria
²Department of Economics, College of Education, Agbor, Delta State, Nigeria.
*Corresponding Author

Abstract:-Recent theoretical position is that monetary policy alone is not sufficient to stabilize prices and that the traditional macroeconomic roles of policies can be reversed such that monetary policies are used for debt stabilization while fiscal policies are used to stabilize prices. This study therefore investigates the impact of fiscal policy on inflation expectations in Nigeria. The study began by investigating the causal relationship between inflation and inflation expectations in Nigeria and confirmed the existence of a bi-causal relationship. Basing its theoretical position on the rational inflation expectations theory, the study sourced data spanning from 1981(Q1) to 2018(Q2) for sixteen variables. These variables were separated into four groups and the principal component of each group of data was used as explanatory variables while the Hodrick-Prescott filtered inflation rate data was used as proxy for inflation expectations. The study applied the Vector Error Correction Mechanism (VECM) and established a negative relationship existing between inflation expectations and fiscal policy in Nigeria. However,the result was not significant. The study then recommends more in-depth studies on inflation expectations related issues generally and specifically, a disaggregated study of the impact of fiscal policy variables on inflation expectations for Nigeria for effective control of inflationary trends in Nigeria.

Key words: “Inflation”, “Inflation Expectations”, “Fiscal policy”, “Monetary Policy”, “Structural variables”, “principal component analysis”

I. INTRODUCTION

One of the key issues of monetary policy is how to reduce inflation persistence. Inspite of this, inflation persistence still remains one of the most exasperating economic phenomena in Nigeria and it had been resistant to, or at best been sluggish in responding to traditional restrictive policies. For example, despite the Central Bank of Nigeria(CBN)’s efforts to rein-in inflation, actual inflation rate are oftentimes higher than CBN’s benchmark inflation rate. Worst still, high inflation rates in Nigeria strives alongside high unemployment rates and excess capacity contrary to theory-based expectations.

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