FISCAL POLICY AND INFLATION NEXUS IN NIGERIA (1985-2023)

This study investigates the relationship between fiscal policy and inflation in Nigeria with the aim of examining both the short-run and long-run effects. Where inflation (INF) serves as the dependent variable, and government revenue (LGRE), government capital expenditure (LGCE), public debt (LDPD), and interest rate (INTR) as the independent variables. Employing the Autoregressive Distributed Lag (ARDL) approach, the research utilized annual time series data spanning (1985-2023). Augmented Dickey-Fuller (ADF) unit root test was conducted to test the stationary of the variables, which revealed a mix of I(0) and I(1) variables, thereby justifying the application of ARDL bounds testing approach. The long-run results revealed that while government capital and debt exerted positive influences on inflation, interest rate exhibited a significant negative impact, thereby suggesting the critical role of monetary-fiscal interactions in stabilizing prices. In the short run, fiscal measures showed mixed effects, with certain lags of government expenditure and debt influencing inflation dynamics significantly, whereas other variables remained insignificant. The error correction term was negative and significant, confirming the presence of a stable long-run equilibrium relationship among the variables. Furthermore, diagnostic tests such as normality, serial correlation, heteroskedasticity, and model specification confirmed the robustness, reliability, and adequacy of the estimated model. The study recommended that policymakers in Nigeria adopt prudent expenditure patterns, diversify revenue sources, and implement fiscal reforms that reduce structural bottlenecks capable of fueling inflation. Ultimately, this study provides valuable insights into how fiscal strategies can be effectively designed to curb inflationary pressures and enhance macroeconomic stability in Nigeria.