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Empirical analysis of fiscal dominance and the conduct of monetary policy in Nigeria

Afolabi, Joseph Olarewaju and Atolagbe, Oluwafemi (2018): Empirical analysis of fiscal dominance and the conduct of monetary policy in Nigeria.

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Abstract

The study empirically investigates fiscal dominance and the conduct of monetary policy in Nigeria, using quarterly data from 1986Q1 to 2016Q4. It adopts the vector error correction mechanism (VECM) and cointegration technique to analyze the data and make inference. The findings reveal that there is no evidence of fiscal dominance in Nigeria. The empirical results show that budget deficit, domestic debt and money supply have no significant influence on the average price level. However, budget deficit and domestic debt are shown to have significant influence on money supply, but only in the short-run. The policy implication is that the government should enforce fiscal discipline through the appropriate institution and the Central Bank should be given autonomy to perform the primary function of long-term price stability, among other functions.

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