Mediation Analysis Money Supply Exchange Rate Fiscal Dominance Macroeconomic Stability Nigeria

This study investigates the impact of fiscal deficit on inflation in Nigeria from 1990 to 2022 and examines whether interest rate adjustments, represented by the Treasury Bill rate, mediate this relationship. Anchored on the Fiscal Theory of the Price Level (FTPL), the study utilized annual data from the CBN, NBS, and IMF. Using ADF unit root tests, Johansen Cointegration, VECM estimation, and the Baron and Kenny mediation framework supported by the Sobel–Goodman test, the analysis confirmed a significant long-run relationship among fiscal deficit, inflation, interest rate, exchange rate, and money supply. Fiscal deficit exerted a strong positive and persistent influence on inflation, while money supply further intensified inflationary pressures.
The results also showed that the Treasury Bill rate and exchange rate had weak and statistically insignificant effects on inflation. Mediation analysis revealed that interest rate adjustments account for only 27.6% of the total effect, indicating partial mediation and limited monetary policy effectiveness under fiscal dominance. Overall, the findings suggest that inflation in Nigeria is largely driven by fiscal imbalances rather than monetary tightening. The study highlights the need for improved fiscal discipline, strengthened policy coordination, and reforms aimed at enhancing macroeconomic stability.