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Government expenditure-revenue nexus reconsidered for Nigeria: Does structural break matter?

Ibrahim, Taofik (2018): Government expenditure-revenue nexus reconsidered for Nigeria: Does structural break matter?

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Abstract

This paper re-examines the government expenditure-revenue nexus in Nigeria from 1970 to 2015. It utilizes the Lee and Strazicich (2003 and 2004) unit root tests that endogenously determines two/one structural breaks in intercept and slope to ascertain the stationarity of the data. The Toda-Yomamoto modified Wald (MWALD)-based causality test that arbitrage between the results with and without structural breaks was conducted to determine the direction of causality between the government expenditure and revenue. The results for the causality test without break suggest that bi-directional causality exists between government expenditure and revenue suggesting the existence of the fiscal synchronization hypothesis. However, the causality test with break reveals a unidirectional causality running from government expenditure to revenue indicating that the spend-revenue hypothesis holds. This finding is a clear departure from other studies on oil-rich countries; thus indicating that accounting for structural break is vital when determining the relationship between government expenditure and revenue for resource countries. This study, therefore, suggests that government should embark on the diversification of the economy away from oil in order to promote reliable and sustained sources of revenue for the nation.

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