Government Budget Deficits and Price Stability in Nigeria: An ARDL Bounds Testing Approach, 1981–2024

Persistent fiscal deficits in Nigeria have coincided with sustained inflationary instability, yet rigorous, methodologically transparent empirical evidence on the deficit–inflation nexus over an extended sample that incorporates the structural reforms of 2023–2024 remains scarce. This study addresses that gap by examining the effect of government budget deficits on consumer price inflation in Nigeria from 1981 to 2024 using 44 annual observations drawn from the Central Bank of Nigeria Statistical Bulletin and the World Bank World Development Indicators. Following a comprehensive battery of unit-root tests (ADF, Phillips–Perron, KPSS) supplemented by the Zivot–Andrews structural-break procedure that classified all variables as integrated of order one, the Autoregressive Distributed Lag (ARDL) bounds testing approach of Pesaran, Shin, and Smith (2001) is applied, with optimal lag selection undertaken via the Akaike Information Criterion and corroborated by the Schwarz Bayesian and Hannan–Quinn criteria. The selected ARDL(1, 1, 0, 1) specification generates an ARDL bounds F-statistic of 7.351, decisively rejecting the null of no cointegration at the 1% level against both Pesaran et al. (2001) and Narayan (2005) finite-sample critical values. In the long run, a one-percentage-point increase in the deficit-to-GDP ratio is associated with a 3.55-percentagepoint increase in the Consumer Price Index inflation rate (p = .042, 95% CI excludes zero), the study’s most robust and policy-relevant finding. The error-correction term of −0.689 (p < .001) indicates that approximately 68.9% of any short-run disequilibrium is corrected within one year, while Granger causality tests confirm unidirectional temporal precedence from deficits to inflation (F = 17.645, p = .0001). The model satisfies the Breusch–Godfrey serial-correlation test, the Breusch–Pagan–Godfrey heteroskedasticity test, the Jarque– Bera normality test, the Ramsey RESET specification test, and the CUSUM and CUSUMSQ stability tests, confirming parameter constancy across successive macroeconomic regimes. The evidence is consistent with the Neoclassical and monetarist predictions of deficit-induced inflation and supports the Fiscal Theory of the Price Level interpretation whereby unbacked nominal liabilities force the price level to adjust. Policy responses should prioritise statutory fiscal rules, entrenched central-bank independence against deficit monetisation, and non-oil revenue diversification.