Macroeconomic Determinants of Inflation in Nigeria: An Analysis of Government Expenditures and Monetary Policy

This study investigates dynamics of monetary and physical policies on inflation in Nigeria from 1986 to 2022 using the AutoregressiveDistributed Lag (ARDL) model. Annual time-series data on Consumer Price Index (CPI), Government Recurrent Expenditure (GRE),Government Capital Expenditure (GCE), and Broad Money Supply (BMS) were sourced from the Central Bank of Nigeria StatisticalBulletin. Descriptive analysis revealed mean values of 109.30 (CPI), ₦2,843.34 billion (GRE), ₦967.50 billion (GCE), and ₦10,181.61billion (BMS), indicating substantial growth over time. The Augmented Dickey-Fuller (ADF) unit root test showed that CPI, GRE,GCE, and log-transformed BMS became stationary after second differencing, confirming suitability for ARDL estimation. The ARDLBounds test (F-statistic = 17.295 > I(1) bound of 6.63 at 1%) indicated a long-run co-integrating relationship among the variables.Short-run estimates revealed that changes in government capital expenditure had a negative but marginally significant impact oninflation (t = -2.0181, p = 0.0579), while lagged changes had a stronger negative effect (t = -4.0021, p = 0.0008). Broad money supplyexerted a significant positive influence (t = 2.5363, p = 0.0201), suggesting that money growth fueled short-run inflation. The errorcorrection term (CointEq(-1) = -0.0118, p = 0.0000) confirmed a slow adjustment speed of 1.18% toward long-run equilibrium.Correlation analysis showed strong positive associations between CPI and GRE (r = 0.9799), GCE (r = 0.9417), and BMS (r = 0.9935).The findings imply that recurrent expenditure and monetary expansion significantly influenced inflation, while capital expendituremoderated it in the long run. Policy recommendations include prioritizing productive investment, prudent management of recurrentspending, and effective regulation of money supply to achieve price stability in Nigeria.