DOES HIGH INFLATION CONSTRAIN FISCAL POLICY AND LIMIT ECONOMIC GROWTH IN NIGERIA?

Abstract

Inflation has been persistently rising in Nigeria over the years to the
extent that fiscal activities tend to validate the old Keynesian postulation
that inflation is fiscally determined. This study investigates whether
inflation constrains fiscal policy and limits economic growth in Nigeria,
and to project future inflation rates as well as the behavior of fiscal
policy in the long run. The study employed the vector autoregressive
model (VAR) model and the ordinary least square technique to examine
the interaction effect of fiscal policy tools with inflation on economic
growth. The study concluded that inflation is not fiscally determined, but
constrains fiscal policy in Nigeria, which in turn restricts economic
growth in Nigeria. Projections show that inflation will decline in the long
run. The policy implications of these findings suggest that higher
inflation rates will, first of all, reduce government revenue, thus
widening the government deficit, and reducing government expenditure
thereby, causing the Nigerian government to increase its debt burden.
Reduction in expenditure during inflation hikes will make the Nigerian
government to prioritize certain sectors of the economy over other
important sectors thus, making government fiscal objectives
unattainable.