Responses of Inflation to Fiscal Deficit and Money Supply in Nigeria

Abstract

Inflation rate plays important role in economic stability of a nation since it is one of the significant macroeconomic variables that affect virtually every aspect of the economy. The study's focus was to ascertain the responses of inflation to shocks in money supply and fiscal deficit in Nigeria. Data used was obtained from Central Bank of Nigeria statistical bulletin from 1981 to 2021. The study adopted vector auto regression (VAR), impulse response functions and variance decomposition for its analysis. Findings of this study revealed that inflation responded negatively to variations in the money supply in Nigeria, Fiscal deficit is a negative function of inflation in Nigeria, thus increase in fiscal policy would likely reduce inflationary tendencies in the country. The study further suggested that government should increase accessibility of funds for borrowing and embark on prudent management of borrowed funds so as to curb inflation in Nigeria.