Governance as a Transmission Mechanism: How Institutional Quality Shapes Fiscal Effectiveness in Nigeria

This study empirically examines how institutional quality moderates the relationship between fiscal policy and fiscal effectiveness in Nigeria from 1996 to 2024. The study employs annual time series data sourced from the Central Bank of Nigeria Statistical Bulletin and World Bank World Governance Indicators. Data were analyzed using Augmented Dickey-Fuller and Phillips-Perron unit root tests, Johansen cointegration, Vector Error Correction Model, Impulse Response Function, Variance Decomposition, Granger Causality, and an interaction regression model. Findings: The results reveal that all variables are integrated of order one I(1) and cointegrated, indicating a long-run relationship. The VECM shows a negative and significant error correction term. The interaction term between fiscal policy and institutional quality is positive and statistically significant, confirming that strong institutional quality amplifies the effect of fiscal policy on economic growth. Impulse response shows that shocks to institutional quality have persistent positive effects on growth. Variance decomposition reveals that institutional quality and fiscal policy jointly explain over 35% of growth variation. Practical Implications: Fiscal reforms in Nigeria will be ineffective without corresponding governance reforms. Policy should focus on strengthening budget credibility, tax administration, and accountability institutions. This study provides direct empirical evidence of governance as a transmission mechanism in Nigeria, moving beyond treating it as a mere control variable.