The relationship between public expenditures, inflation, and economic growth in Nigeria

Kehinde Samuel Paul

Master's thesis

Abstract:

Public expenditure and inflation are two viable macroeconomic variables at the disposal of policymakers to drive the economy. However, the manner in which these tools are employed can either engender or impede the growth of the economy. Thus, the study investigated the contributions of public expenditure and inflation to the economic growth of Nigeria between 1980 and 2022. The study used GDP as the measure of economic growth and disaggregated public expenditure into government capital expenditure (LGCE) and recurrent expenditure (LGRE). The dynamic ARDL model estimator was utilized to analyze the dataset after checking cointegration using the bound test. The bound revealed that cointegration exists between economic growth, public expenditure, and inflation in Nigeria. The findings from the DARDL regression showed that government capital expenditure has a negative and significant impact on the economic growth of Nigeria in the short and long run, but government recurrent expenditure has a positive and significant impact on the economic growth of Nigeria, both in the short run and the long run. Inflation exacted a negative and significant impact on economic growth in Nigeria, both in the short run and the long run, while the exchange rate remained volatile, thereby impeding the growth of the economy in the short run and long run, but the money supply enhanced economic growth in Nigeria, as indicated by the short- and long-term results. The study therefore recommends, among other things, that price control mechanisms be put in place to encourage domestic production and reduce imports.

Abstract:

Public expenditure and inflation are two viable macroeconomic variables at the disposal of policymakers to drive the economy. However, the manner in which these tools are employed can either engender or impede the growth of the economy. Thus, the study investigated the contributions of public expenditure and inflation to the economic growth of Nigeria between 1980 and 2022. The study used GDP as the measure of economic growth and disaggregated public expenditure into government capital expenditure (LGCE) and recurrent expenditure (LGRE). The dynamic ARDL model estimator was utilized to analyze the dataset after checking cointegration using the bound test. The bound revealed that cointegration exists between economic growth, public expenditure, and inflation in Nigeria. The findings from the DARDL regression showed that government capital expenditure has a negative and significant impact on the economic growth of Nigeria in the short and long run, but government recurrent expenditure has a positive and significant impact on the economic growth of Nigeria, both in the short run and the long run. Inflation exacted a negative and significant impact on economic growth in Nigeria, both in the short run and the long run, while the exchange rate remained volatile, thereby impeding the growth of the economy in the short run and long run, but the money supply enhanced economic growth in Nigeria, as indicated by the short- and long-term results. The study therefore recommends, among other things, that price control mechanisms be put in place to encourage domestic production and reduce imports.

Keywords

Recurrent Expenditure, Capital Expenditure, Inflation, Public Expenditure, Economic growth, Nigeria, Autoregressive Distributed Lag (ARDL)

Keywords

Recurrent Expenditure, Capital Expenditure, Inflation, Economic growth, Public Expenditure, Nigeria, Autoregressive Distributed Lag (ARDL)

Language used: English

Date on which the thesis was submitted / produced: 15. 4. 2024

Thesis defence

• Date of defence: 2024
• Supervisor: Karel Brůna
• Reader: Ondřej Šíma

Vysoká škola ekonomická v Praze

Master programme:
Finance and Accounting