Association Between Government Expenditures, Inflation and Interest Rate in Nigeria

Erasmus E. Duru & Sebastian O. Uremadu

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Abstract

The study analysed the relationship between government expenditure, economic growth, inflation and interest rate in Nigeria. The high inflation and interest rate with high government expenditure has been a problem for the Nigerian economy. Secondary data from 1986 to 2022 were collated from the Central Bank of Nigeria Statistical Bulletin and analyzed using multiple regression analysis. The results showed a positive relationship between inflation rate, government expenditure and Gross Domestic Product (GDP). This means that as inflation and government expenditure increased, real gross domestic product (GDP) would increase while there existed an inverse relationship between interest rate and gross domestic product (GDP), which implies that as interest rate increased, GDP would decrease. The test for the model fitness using adjusted R2 indicated the predictor values accounted for 95 per cent variations in the dependent variable (GDP). The study therefore recommended that monetary and fiscal authorities should regulate government expenditure by targeting a contractionary fiscal policy which decreases the amount of government expenditure in a bid to tackle inflationary trends. The government should aim at inflation targeting through a single-digit interest rate which could encourage the private sector to accumulate funds to be used to augment government efforts in regulating stability in the economy. Besides, even though the structural inflation facing the country did not have a very significant effect on the domestic economy concerning government expenditure and its impact on GDP, this should be resolved by dismantling all rigidities and bottlenecks such as the war against insecurities and herdsmen that have been distorting farming and agricultural output in Nigeria of late.

Authors

Department of Banking and Finance
College of Management Sciences
Michael Okpara University of Agriculture, Umudike
Umuahia, Abia State, Nigeria

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