Empirical Investigation of the Determinants of Household Expenditure in Nigeria: The Role of Income and Inflation

This study examined the determinants of household expenditure in Nigeria. The specific objectives are to determine the symmetric effects of household income and inflation on household expenditure. The data for the variables were collected from the Central Bank of Nigeria's Statistical Bulletin. Descriptive statistics, unit root and bounds cointegration tests as well as autoregressive distributed lag (ARDL) model formed the basis for the data analysis. The unit root test results showed that the variables are fractional with household expenditure and household income being stationary at levels while inflation rate is stationary at first difference. The bounds cointegration test results showed that household expenditure has long run relationship with household income and inflation. In the long and short run, the ARDL estimates showed that household income has a strong positive impact on household expenditure. In comparison, the estimated coefficients showed that the long run effect is stronger than the short run. The implication of this finding is that increase in household income improves the purchasing power of households with positive contribution to household consumption. It further explained the substantial role played by household income in shaping the consumption behaviour of households. However, the results showed that inflation has a negative, but negligible impact on household consumption in the long and short run. The error correction coefficient (-0.5074) has the expected negative sign and it is highly significant at 1 percent level, indicating that the model can adjusts to long run equilibrium position at a speed of 50.74 percent. Given the findings, it is recommended that policymakers should ensure that the review of income policy is consistent with the economic condition in the country to improve the purchasing power of households.