The Tax-Spend Nexus in Nigeria: Evidence from Asymmetric Modeling

This paper examines the relationship government expenditures and revenues in Nigeria by reposing the implicit assumption of a symmetric adjustment process underlying the standard cointegration and error correction model. The study estimates an asymmetric error correction model using the momentum threshold autoregression framework over the period 1961–2012. First, the results suggest that revenues and expenditures are cointegrated and that the adjustment process of the budgetary disequilibrium is asymmetric. Second, in the short-run there is evidence of a bi-directional causal relationship between government revenues and expenditures. Third, the long-run results show that revenues and expenditures respond to budgetary disequilibrium. The asymmetric adjustment reveals that revenues respond only to a worsening budget, and government expenditure respond to a worsening budget than for an improving budget.