Greener Journal of Economics and Accountancy

Open Access

Nwaeze et al

Greener Journal of  Economics and Accountancy Vol. 6 (3), pp. 065-081, November 2017

 ISSN: 2354-2357 © 2017 Greener Journals

Research Paper

Manuscript Number: 112017169



Does Fiscal Deficit Stimulate Employment? Evidence from Nigeria’s Experience: VAR Approach


*1Nwaeze Nnamdi Chinwendu, 2Kalu Ijeoma Eme,

3Tamuno Steve Otonye


1Dept. of Economics, University of Port Harcourt.

2Dept. of Economics, University of Port Harcourt.

3Department of Economics, University of Port Harcourt.


This study investigated the relationships between fiscal deficit, financing options vis-a-viz domestic and external borrowing financed deficits and unemployment rate in Nigeria. The study adopted the vector autoregression (VAR) econometric technique to analyze the time series data obtained from the Central Bank of Nigeria and other sources. The study found long run relationship between unemployment and the other endogenous variables, namely; GDP per capita, overall fiscal deficit, domestic credit to the private sector, domestic borrowing financed deficit, external borrowing financed deficit and foreign direct investment. The study also found positive relationship between unemployment rate and fiscal deficits. However, the variation in unemployment is mainly from overall fiscal deficit financed through domestic borrowing. The study concluded that, fiscal deficits especially when financed through domestic borrowing components, have contributed in fuelling worsening unemployment problem in Nigeria. This is found to be empirically true as mounting public debt burden pose an obstacle to initiating new critical development projects that could generate employment. The study recommends that the rising trend of using domestic sources to finance fiscal deficit should be moderated and discouraged. If borrowing is absolutely necessary, external borrowing should be a better alternative. In the stead of public borrowing, fiscal managers should also undertake holistic tax reforms to improve tax revenue and use same to fund government expenditure expansions, especially new critical capital projects with positive linkages.


Keywords: fiscal deficit, unemployment, aggregate demand, employment stimulation and crowding out

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