Greener Journal of Economics and Accountancy Vol. 6 (2), pp. 043-064, September 2017
ISSN: 2354-2357 © 2017 Greener Journals
Manuscript Number: 090517121
Fiscal Deficit, Financing Options and Macroeconomic Stability in Nigeria: A Disaggregated Approach
Nwaeze, Nnamdi Chinwendu
Department of Economics, Abia State University, Uturu.
The study examines empirically the relationship between fiscal deficits and macroeconomic stability in Nigeria from 1970 to 2016. The data for the empirical analysis was sourced from secondary sources such as the CBN statistical bulletin. The study used Inflation Rate (INFL) and Exchange Rate (EXCR) to proxy macroeconomic stability whereas Overall Fiscal Deficits (OFDE), fiscal deficit financed by Domestic Borrowing (DBFD), fiscal deficit financed by External Borrowing (EBFD), Interest Rate (INTR), Money Supply (MS), Foreign Direct Investment (FDI) and External Reserve Balance (EXTR) are used as the endogenous variables. The study employed descriptive statistics, unit root test, co-integration and VAR estimation methods to analyze the data. The results of the variance decomposition reveal that Interest rate (INTR), overall fiscal deficits (OFDE) and the size of fiscal deficits financed by domestic borrowing (DBFD) are the main shocks causing the variation in inflation (INFL), while overall fiscal deficits (OFDE), the size of fiscal deficits financed by external borrowing (EBFD) and the size of fiscal deficits financed by domestic borrowing (DBFD) are the main shocks causing the variation in exchange rate (EXCR) in Nigeria. The study concludes that fiscal deficits have significant negative impact on macroeconomic stability vis-a-viz inflation and exchange rates in Nigeria. The study recommends that fiscal deficits should be moderated and financed chiefly through bonds as empirical finding suggests that both domestic and external borrowing options are detrimental to the macroeconomic stability on the Nigerian economy.
Keywords: Fiscal deficit, domestic borrowing, external borrowing, macroeconomic stability, inflation rate, exchange rate and expansionary effect.
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