Are Fiscal Deficits Inflationary in Nigeria? Evidence From Cointegration With Structural Breaks

Abstract In this paper, we model the relationship between fiscal deficit and inflation for Nigeria using annual data from 1980 to 2019. We employ the Linear ARDL approach and also account for structural breaks using the Bai and Perron (2003) test that allows for multiple structural changes in regression models.The paper finds that fiscal deficit is a major determinant of inflation along with other macroeconomic factors considered in the study. However, we observe that it may be necessary to pre-test for structural breaks when modelling the relationship between fiscal deficit and price level as it performs better than when structural events are not considered.The results imply that a fiscal management process that does not encourage increased revenue and reduce fiscal deficits in Nigeria will further worsen the level of inflation in the country.