Fiscal dominance and inflation: Evidence from Nigerian and South African’s experiences

Abstract

This study attempted to estimate degree of fiscal dominance by econometrically analysing degree of fiscal and monetary policies interdependence in Nigeria and South Africa. This is done to define the extent at which fiscal authority actions confine the monetary policy actions. The empirical confirmation offered in the study on the basis empirical findings showed that the degree of fiscal and monetary policies interdependence for both Nigeria and South Africa are 0.84 and 0.67. This shows that degrees of fiscal dominance in both economies are 0.16 and 0.33 respectively. The evidence shows that both economies are under low fiscal dominance, though Nigerian economy is seen to be under a lower fiscal dominance hypothesis when compared with South African economy. Therefore, the Nigerian monetary authority has greater freedom to fight inflation. However, the Nigerian economy still has a higher inflation than South Africa. The study concludes based on the empirical findings, that monetary policy authorities in Nigeria and South Africa should strive more to maintain the current level of their autonomy given their higher degree of fiscal and monetary policies interdependence. Current level of autonomy can be maintained by ensuring that the fiscal authority plans its intertemporal budget constraints such that current level of government outstanding debt and its interest would always be offset by future primary surpluses rather than seigniorage.

Keywords

• fiscal dominance
• fiscal policy
• monetary policy