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FISCAL POLICY AND INFLATION VOLATILITY IN NIGERIA

FISCAL POLICY AND INFLATION VOLATILITY IN NIGERIA

 

Abstract: The question of fiscal-monetary policy nexus is widely documented in the literature, especially in studies that focus on developed economies. Studies suggest that inflation rate is an inevitable economic factor that contributes to economic instability and therefore warn against its uncertainty. Most developing countries including Nigeria have high inflation rates which is claimed to be one of the leading factors contributing to inflation volatility, however the role of fiscal policy has not been emphasized. To this end, this study examines the impact of fiscal policy on inflation volatility in Nigeria, using the framework of error correction mechanism. The results of the study show that discretionary fiscal policy has a transitory effect on inflation volatility in the short-run and a significant negative effect on inflation volatility in the long-run. The results further show that oil price volatility and exchange rate volatility have negative and significant effects on inflation volatility in the long-run while the fluctuations caused by the level of inflation to its volatility is minimal in the long-run compared to the short-run effect. The paper concludes that discretionary fiscal policy has a long-run negative and significant effect on inflation volatility in Nigeria.

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