Frequency domain approach to causality among fiscal deficit, interest rates and inflation in Nigeria

Abstract

Using quarterly data from 1993:q1-2018:q1, this paper examines causal relationship among budget deficit, interest rates and inflation in Nigeria in a multivariate causality setting. Instead of time domain causality methods commonly used in existing studies, this study adopts a frequency domain causality approach (FDCA) that allows differentiating causal relationships in the short-, medium- and long-term. After testing for stationarity and cointegration of variables, the results show that fiscal deficit Granger causes interest rate only in medium-term in the study period. However, Granger causality results could not provide evidence that, both in the short run and long run, there was causality between fiscal deficit and inflation in one hand and interest rate and inflation rate on the other hand. This paper concludes that fiscal deficit is a significant driver of interest rate in Nigeria.