Fiscal Dominance and the Effectiveness of Monetary Authority in Nigeria 1980-2020

Abstract

The study examined the existence as well as the degree of fiscal dominance in Nigeria. Annual time series secondary data for the period 1980-2020 were employed in the study. Specifically, data on fiscal deficit, public debt, government expenditure, money supply, interest rate, and real Gross Domestic Product (GDP) for the study period were obtained from the Central Bank of Nigeria (CBN, 2020), and the World Development Indicators (WDIs, 2020). The study used descriptive statistics in form of tables, and the Dynamic Ordinary Least Squares (DOLS) for long run analysis. It was established in the study that government expenditure and outstanding debt have significant positive relationship with money supply. Specifically, N1 billion increase in public debt is expected to increase money supply by N1.2 billion (t = 8.25, p < 0.01). Similarly, N1billion increase in government spending will cause money supply to increase by N1.36 billion (t = 4.29, p < 0.01). Conversely, interest rate exhibited negative effect on money supply, such that one percent increase in interest rate will bring money supply down by 150 percent (t = -2.0113, p < 0.05). With a measure of fiscal dominance with the δ of 0.28, the study concluded that there is no case of fiscal dominance in Nigeria. The study recommends that with the active counterbalancing roles of monetary policy Nigeria, the government can aggressively pursue and sustain economic growth through fiscal expansion-backed borrowings and spending.