Fiscal Policy, Inflation Volatility, and Macroeconomic Instability in Nigeria: A GARCH-Family Modelling Approach with Asymmetric Effects and Structural Break Analysis

Abstract

This paper investigates the dynamic relationship between fiscal policy instruments and inflation volatility in Nigeria over the period 1990Q1–2024Q2, deploying a sophisticated econometric framework that integrates Generalised Autoregressive Conditional Heteroskedasticity (GARCH) modelling — including GARCH(1,1), EGARCH(1,1), and GJR-GARCH(1,1) specifications — with Autoregressive Distributed Lag (ARDL) bounds testing and structural break analysis. The core innovation of this study lies in explicitly modelling inflation uncertainty as a time-varying, heteroskedastic process driven by fiscal policy shocks, rather than treating volatility as a nuisance parameter. Using quarterly data on government expenditure (GEXP), total government revenue (GR), fiscal deficit (FD), and the consumer price index (CPI), we find that: (i) inflation in Nigeria exhibits significant ARCH effects and conditional volatility clustering, confirming the validity of GARCH-family models; (ii) government expenditure shocks significantly increase both the level and conditional variance of inflation, with asymmetric leverage effects confirmed by the EGARCH specification — negative fiscal shocks (expenditure contractions) generate disproportionately larger volatility responses than positive shocks of equal magnitude; (iii) fiscal deficit persistently feeds inflation uncertainty, with the GJR-GARCH estimates revealing that deficit shocks above a threshold trigger regime shifts in inflation volatility; (iv) three significant structural breaks are identified — 1999 (democratic transition), 2009 (post-financial crisis fiscal stimulus), and 2020 (COVID-19 emergency spending) — each associated with discrete upward jumps in the GARCH volatility process; and (v) ARDL bounds testing confirms a long-run cointegrating relationship between fiscal variables and inflation, with government expenditure contributing a long-run coefficient of 0.347 and fiscal deficit contributing 0.218 to CPI growth. The findings carry profound implications for fiscal-monetary policy coordination, inflation targeting frameworks, and the design of fiscal rules in oil-dependent economies.