FISCAL DECENTRALIZATION AND MACROECONOMIC STABILITY IN NIGERIA

Abstract

Given the benefits of fiscal decentralization and the drive among developing and transition countries including Nigeria to decentralize their expenditures and revenues to sub-national government as part of a broader objective for enhancing public sector efficiency, this study examined fiscal decentralization and macroeconomic stability in Nigeria. The Vector Autoregressive (VAR) model is used along with Johanson’s Vector Error Correction Model (VECM) for the empirics. The co-integration results revealed that, the maximum Eigenvalue statistic confirmed the existence of co-integrating equations among the variables of interest. This suggested the tendency of a long run relationship among the variables under consideration. The VAR result indicated that the one lagged period of macroeconomic variable is not a driver of economic growth as it coefficient exhibits negatives values and not statistically significant. The VECM result indicated that there will be long run relation among the variables under consideration. The empirical result went further to show that, fiscal decentralization has not encouraged macroeconomic stability that has significantly led to economic growth in Nigeria. The study therefore recommends the need for practical devolution of fiscal responsibility especially in the areas of revenue assignment.