INFLATION DYNAMICS AND GOVERNMENT SIZE IN NIGERIA

The objective of this paper is to gauge the correlation between government size and developments in consumer price index with recourse to Nigeria for the period of 1981-2013. The study was implemented within the frame-work of the so called systems equations, founded on co-integration and vector error correction model (VECM) methods. The results indicate that: (i) Long run equilibrium relationship exist between consumer price index and government size in Nigeria. (ii) No long run causal relationship was identified between consumer price index and government expenditure in Nigeria. (iii) There is no short run causality running from government expenditures to consumer price index in Nigeria. The results further suggest that a development in consumer price index in Nigeria is a function of its previous period values (inflationary expectations) and exchange rate of the domestic currency, meaning that the much touted assumption by policy makers in Nigeria, that government size causes inflation, is not supported by this enquiry. The above results present some policy implications that government of Nigeria cannot comfortably regulate the levels of inflation in the economy by moderating the level of its expenditures. This suggests that government expenditure should not be intended for the moderation of developments in consumer price index, rather, Policy measures designed to ensure effective and appropriate pricing of the domestic currency should be put in place for effective control of inflation in Nigeria