Public Deficit, Trade Deficit and Macroeconomic...

Momodu Ayodele A. et al., International Journal of Research in Management, Economics and Commerce,

ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 07, July 2017, Page 105-120

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Public Deficit, Trade Deficit and

Macroeconomic Performance in Nigeria

Momodu Ayodele A.1 and Monogbe Tunde G.

2

1(Department of Banking and Finance, Rivers State University of Science and Technology, Nkporlu, Port Harcourt, Rivers State Nigeria)

2(Department of Finance and Banking, Faculty of Management Sciences University of Port Harcourt Rivers

State, Nigeria)

Abstract: The consequences of deficits depend on how they are financed. For example, money creation leads to inflation, domestic borrowing leads to credit squeeze probably through higher interest rate or with fixed interest

rate through credit allocation and ever more stringent financial repression resulting in the crowding out of

private investment and consumption. External borrowing leads to a current accounts deficit and appreciation of

the real exchange rate and something to a balance of payment crisis if foreign reserve is drawn down or an

external debt crisis if debt is too high. In the light of these instances, this study set out to investigate the

influence of public deficit on macroeconomic performance in Nigeria between the periods 1981 to 2016 using a

structural analysis of vector auto regression. The result shows that interest rate and inflation rate respond to

fiscal deficit in a direct manner such that rise in fiscal deficit is capable of fuelling inflationary gap and interest

rate imbalances while exchange rate also react in a direct manner to public deficit and trade deficit. The

economic implication of this is that rise in trade deficit could result into unfavourable balance of trade and payment as this will upshot the exchange rate in favour of dollar and thus dampens the Nigerian economy.

Based on these findings, this study recommended that Policymakers must pay close attention to the

compensation of government spending when fashioning an accommodating exchange rate policy.

Keywords: Trade Deficit, Fiscal Deficit, Public Deficit, Macroeconomic Variables

I. INTRODUCTION Although fiscal adjustment are economic phenomena employed by countries when faced with

economic downturn. Considerable uncertainty remains about the relation between fiscal policy and

macroeconomic performance. To illustrate how financial markets, private spending and the external sector react

to fiscal policies, the behaviour of holdings of money and public debt, private consumption and investment, the

trade balance, and the real exchange rate is model for Nigeria.

Fiscal policy can be blamed for much of the assorted economic ills that beset this country; over

indebtness and the debt crisis, high inflation, poor investment performance and growth. Attempt over the years

to achieve macroeconomic stability through fiscal adjustment have achieve little success, raising question about the macroeconomic consequence of public deficit and fiscal stabilization. One recurring question is whether

larger public deficits are always associated with higher inflation, Sargent and Wallances (1985). The monetarist

arithmetic answers this question affirmatively. But the relationship is blurred because government finance her

deficits by borrowing as well as by printing money. The relationship is further muddled by other influences such

as unstable money demand, inflationary exchange rate depreciations, and stubborn inflationary expectations. If

larger public deficits are associated with higher inflation, what are the trade-offs in financing the debt through

money creation.

Another ambiguity factor is interest rate. The question is does, deficit push up domestic real interest

rate when the government rely more on domestic debt instrument? Or is this relationship also blurred by such

factors as interest rate, degree of substitutability between public debt instrument and other assets held by private

sector. On this premise, another question arose that will consumer reduce their spending when taxes are raised and increase it when taxes are lowered? Or will you offset only charges in government consumption without

reacting to changes in government tax or debt financing.

Another problem area is the effect of government spending on investment. Does a higher level of

public capital spending boost or lower private investment? Theory predicts and the limited evidence available

for developing countries confirms, that the effects depends on whether private and public investment

complement or substitute for each other. If real interest rate does rise in response to higher domestic debt

financing of deficits, how does that affect private consumption and investment. Although theory argues that the

effect is ambiguous, because of the potentially offsetting substitution, income and wealth effects, it however

predicts that private investment will decline with higher interest rates. However, a growing body of evidence

supports the motion that private consumption is insensitive to real interest rates (Corsetti Wedd 1992).

The final question is, how do fiscal deficits feed in to external deficits? One expects a strong link

between fiscal deficit and current account deficits in financially open economies. This paper set to examine





these issues in the Nigerian context. After reviewing alternatives measures of the fiscal deficit and broad

outlines of fiscal adjustment, the paper focuses on relation of the domestic financing of deficits to inflation, and

real interest rates. It also look at the direct and indirect effect of public spending, taxation and deficits on private

consumption and investment as the spill over into external imbalances and the real exchange rate.

2.0 Review of Related Literature

Wosowei (2013) examined the relationship between fiscal deficit and macroeconomic using time series data between the periods 1980 to 2010. Four different estimation tools was employed while four explanatory

variables were used as a proxies for macroeconomic variables while gross domestic product captures for fiscal

deposit. The result of the multiple regression shows that none of the macroeconomic proxies significantly

stimulated fiscal deficit as such, study concluded that fiscal deficit does not significantly contribute to economic

performance. Hence, the study recommends that the level of deficit of the government should be minimize to

ensure that the debt level of the state will be curtail.

In another related study, Yunana and Amba (2015), unrestricted auto regression model was developed

due to lack of long run association among the employed variables. Time series data were employed between the

periods 1970 to 2013. The study proxies the macroeconomic variables using inflation rate while fiscal deficit

was proxies using money supply, exchange rate, monetary policy, interest rate, gross domestic product and

fiscal deficit. Finding from the study shows that data became stationary at order 1(1) while there exist no long

run association among employed variables as reported by the result of co-integration test. The study thus conclude that fiscal policy over the year has orchestrate macro-economic instability in Nigeria and as such the

authority of the Nigerian economy should as a matter of urgency curtail her deficit by planning her expenses

based on the generated revenue available in the government pulse.

Oyeleke and Ajilore (2014) jointly examined the interplay between fiscal deficit and selected

macroeconomic variable in Nigeria using time series data for a period of 1980 to 2010. Study put into account

error correction model, co-integration test and series of diagnostics test to establish the fitness of the model.

From the report of the error correction model, it was identified that government expenditure which represent

fiscal policy weakly exhibit a significant correlation to macro-economic variables in Nigeria. The study further

shows that the perpetuity of the government debt would promote the deficit gap of the nation hence the authority

show cut her spending in conjunction to her generated revenue.

Eigbiremolen, et al (2015) investigated budget deficit and macroeconomic fundamentals in Nigeria using unrestricted VAR estimate due to lack of co-integrating equation as reported by the result of the johansen

co-integration test. Study covers for the periods of 1970 to 2012, model stability test was conducted while

structural analysis of the impulse response and variance decomposition were used in result justification.

Findings reveals that in the short run, budget deficit react to gross domestic product in a positive manner, as

time goes on the responsiveness of budget deficit change and thus became negative while interest rate react

negatively to increase in money supply and finally, high interest rate will gush out private investor from the

business world as reported by the neo-classical (crowd out effect). The study therefore suggests that private

investor is key player in ensuring economic advancement. Having understood that, the authority should control

the rate of competition between the private and the government in sourcing for loanable fund.

Ali and Ahmad (2014) using auto regressive distributed lag, empirical examined the responsiveness of

fiscal policy to the output of the Nigerian economy using time series data between the periods 1970 to 2011.

The study utilises some selected proxies of fiscal policy which includes fiscal deficit as a measure of gross domestic product, government capital expenditure as a measure of gross domestic product, recurrent expenditure

as a measure of gross domestic product while the real gross domestic product was employed to proxy economic

output in Nigeria. The study utilises Philip Peron unit root test to ascertain the reliability capacity of the data set,

since absence of co-integration was identified, study employs unrestricted VAR estimate where lag criterion

selection was conducted. Finding therefore reveals that government capital expenditure causes economic

advancement in Nigeria. The study hence concludes that in this present era of transformation in Nigeria,

expansionary fiscal policy is essential and that it should not be expanded beyond the absorbing capacity of the

economy to avoid inflationary pressure. Thus, study recommended that to enjoy fruitful budget deficit in

Nigeria, the budgetary system should be reviewed.

Monogbe and Okah (2017) empirically test the Keynesian, neoclassical and Ricardo hypothesis in

respect of this respective view on deficit financing. This study centred on the Nigerian context where federal government external debt, domestic debt and budget deficit were proxies for deficit financing and human

development index was used as a proxy for economic development. The aim of the study is to examine the

effect of deficit financing on economic development in Nigeria and thus ascertain which of this school of

thought postulation holds in Nigeria. Study employed johansen co-integration test where two co-integrating

equation was discovered. Time series data were employed from central bank of Nigeria statistical bulletin

between the periods 1981 to 2015. Findings reveals that federal government external debt has significantly

stimulated economic development over the years but in the practical sense, the positive response has not been

experience due to what was tag please effect. This pleases effect according to Momodu and Monogbe (2017) are





the major causes of government budget deficit gap and there includes moral hazard, financial indiscipline and

financial mismanagement. Study therefore recommends that borrowed fund should be channelled toward

production domain of the economy to ensure adequate production output which will enable the government to

reimburse the borrowed fund.

Momodu and Monogbe (2017) empirically examined lag effect of budget deficit on performance of the

Nigerian economy using time series data between the periods 1981 to 2015. Study employs a univariate model of the vector auto regression estimate where real gross domestic product was proxy for economic performance.

From the empirical investigation, it was recorded that in the short run, budget deficit significantly stimulate the

Nigerian economy but in a negative manner. This inverse responsiveness of the budget deficit to economic

performance in Nigeria could be attributed to misappropriation of fund on the side of the government agencies.

From the VAR estimate, it was drawn that at lag 1, government budget deficit appear to be positive and

significant while at lag 2, a negative response occur which thus validate the result in the multiple regression.

Study therefore concludes that since the previous year deficit is correct in the present year, government budget

deficit is contributed to the growth of the Nigerian economy in the past year while in the present age, the

contribution is becoming a mirage. The study therefore recommended that policy makers should ensure that

borrowed fund are effectively utilise to ensure productive returns as this will help in actualising better

performance of the economy.

Monogbe, et al (2016) empirically investigated macro-economic variable and its behavioural effect on government spending in Nigeria using vector error correction model. The eclectic objective of this study is to

examine the response of macro-economic variables on the spending of the Nigerian economy between the

periods 1981 to 2014. This study employed Phillip perron, co-integration test and error correction model.

Findings revels that the behavioural effect of macro-economic variables to government spending in Nigeria is

multidimensional. Interest rate and balance of trade report negative behaviours to macro-economic variables.

From the study, the negativism of the balance of trade suggests that the Nigerian economy import more than she

export which suggest unfavourable balance of payment. The study therefore concludes and recommended that

larger percentage of the government spending should be allocated to production sector to ensure high level of

productivity and thus encourage exportation.

Momodu and Monogbe (2017) examined that structural factor that can hinder government deficit from

producing a fruitful result in Nigeria. The paper has attempted to provide support for the conjecture that certain structural characteristics probably more related to the expenditure side of the budget than to the revenue side

have made it more problematic for Nigeria to break out of the circle of budget deficits. Empirically, this study

seek to ascertain those factors which might probably lead to widening in government deficit without a

corresponding increase in the level of economic development over the years. This study proposes that some

structural factors has been behind the ever increasing deficit gap of the Nigerian government. As such, four

different factors were proposed and subjected to statistical test in other to identify which of these factors truly

deepens the government deficit gap in Nigeria. Haven subjected all proposed structural factors that could lead to

increase in government budget deficit in Nigeria to statistical test, study reveals that economic development,

lack of government control over expenditure and Government revenue growth rate exhibit a positive and

significant relationship and thus deepens government budget deficit gap in Nigeria. Study therefore suggest that

lack of government control over her expenditure, growth rate of government revenue and economic

development pace are major structural factors that deepens the budget deficit gap of the Nigerian economy.

II. ANALYTICAL FRAMEWORK Government can finance deficit by printing money, local borrowing or borrowing from outside the

world. As a starting point, we can define a public deficit financing identity for the broad public sector, public

enterprise and the central. With this identity, we can trace out and quantify the macroeconomic effects of public

deficits.

Haphazardly, public deficit financing is equal to money financing plus domestic debt financing plus

external debt financing .i.e. PDF = MF + DDF + EDF………………(1)

The consequences of deficits depend on how they are financed. As a first step it can be said that each major type of financing, if used excessively can result in a specific macroeconomic imbalance. For example,

money creation leads to inflation, domestic borrowing leads to credit squeeze probably through higher interest

rate or with fixed interest rate through credit allocation and ever more stringent financial repression resulting in

the crowding out of private investment and consumption. External borrowing leads to a current accounts deficit

and appreciation of the real exchange rate and something to a balance of payment crisis if foreign reserve is

drawn down or an external debt crisis if debt is too high.

To estimate the effects of domestic deficit financing on inflation and real interest rates, we apply a

portfolio-balance model for the demand for money and public debt instrument linking it to the public deficit

financing identity. Econometrics estimations of demand for money balances and domestic debt, which reflect

sub section between these two assets and a third asset typically foreign currency or foreign interest bearing asset





in the portfolios of asset holder, are the back bone for assessing the effects of domestic financing of the fiscal

deficit on monetary and financial markets.

Secondly, we can start by saying that public deficit are finance by surplus from other sectors. So we

can rewrite the public deficit in terms of the economy aggregate resources or the saving-investment constraint.

Public deficit equals to public investment less public savings where public savings equals private savings less

private investment plus foreign savings. This can be written mathematically thus; PD = PI – PS = (Pr + S – Pr + I) – FS……………….(2)

Larger public deficit must leads to some combination of lower private consumption, lower private

investment and higher foreign savings. The critical equation is what determines that combination, which of the

three components on the right side of the last equation bears the burden of higher public deficits. The answer

tailored broadly on four factors that influence private domestic and foreign response to public deficits which

includes the flexibility and sophistication of the financial markets, access to external financing, the sources of

domestic financing, (money or bonds) and the composition of the deficit.

The framework for analysing the sensitivity of private consumption and investment to fiscal policy is

that of consumer and investors behaviour constrained by imperfect access to financial markets. The specification

of private consumption considered three alternatives hypothesis- Keynesian, permanent or long term and

Ricardian. But, the specification of private investment considered the direct and indirect effect through higher

interest rates of the deficits as well as whether an increasing public investment causes private investment to rise or fall. Econometrics estimations can quantify the impart of the deficit and of the composition of the underlying

spending and financing on private consumption and investment, including the indirect effects through inflation

and real interest rate.

Specification of the behaviour and sensitivity of the trade deficit and real exchange rate to public

deficit and to fiscal policy related variables can follow the Rodriquez (1989) framework. Through a two-step

relationship link the deficit and the real exchange rate, the analysis will show how fiscal policies affect private

spending. The fiscal deficit among other determinants of private spending affect the external deficit, which then

determines the real exchange rate that is consistent with the clearing of the market for non-traded goods. The

statistical estimation of these relations can quantity the impact of the deficit and its composition on the trade

balance and the real exchange rate. This is the framework for money and financial market, private consumption

and investment and the trade deficit and real exchange rate. As a final point on the methodology, this paper showed focus on how public deficit influences the

macro economy in the Nigerian context. In an attempt to actualise the objectives of this study, we develop four

econometric model. This research work employs ex post facto research design where data were sourced from the

central bank of Nigeria statistical bulletin and index mundi. The study covers for 35 years where Some selected

macroeconomics indicators we considered such as interest rate, exchange rate, inflation rate and gross domestic

product while public deficit indices like fiscal deficit, public deficit and trade deficit were also considered

accordingly.

Model Estimation

Following the classical linear regression model assumption and in consonant with the Rodriquez (1989)

framework, we design our model in a functional form thus;

INFL = F (FD)…………….(3)

INTR = F (FD)……………….(4) GDP = F (FD)………………..(5)

EXR = F (PUDT, TDF)………….(6)

The above model is converted into an econometrics model by introducing slope and error term thus;

INFLt= β0 + β1FDt + Ut -------------- (7) β1 > 0 INTRt = a0 + a1FDt + Ct -------------- (8) a1 < 0 GDPt = C0 + C1FDt + Vt -------------- (9) C1> 0 EXRt = Do + D1PUDTt + D2TDFt + Mt---------- (10) D1D2<0.

Where;

INFL = Inflation

INTR = Interest Rate

GDP = Gross Domestic Product EXR = Exchange Rate

FD = Fiscal Deficit

TDF = Trade Deficit

PUDT = Public Deficit

β1, a1, C1, D1 D2= Slope of each model

β0, a0, C0, Do = Regression Constant.

= = the parameter estimates Ut, Ct, Vt, Mt = Error Term for each model





III. ANALYTICAL PRESENTATION

This paper showed focus on how public deficit influence the macro economy in Nigeria. In an attempt

to actualise the objectives of this study, reliability test of the stationarity test is considered thus;

Table 1: Presentation of Unit Root Test Report

Variables ADF Stat Critic Val @ 5% Prob Value Status

INFL -4.73116 -2.96041 0.0006 STATIONARY

INTR -8.52286 -2.95113 0.0001 STATIONARY

GDP -4.08772 -2.95113 0.0032 STATIONARY

FD -6.43262 -2.95113 0.0001 STATIONARY

TDF -3.55598 -2.95113 0.0123 STATIONARY

PUDT -5.87689 -2.95113 0.0003 STATIONARY

EXR -5.51058 -2.95113 0.0001 STATIONARY

Source: Extraction from E-view

A reliability coalition exists among the time series under investigation such that all the explained and

explanatory variables exhibit a meaningful association with one another. Hence, the data became stationary in

the order of 1(1) integration after first differencing. This study went further in examining the long run

relationship that may have existed among the employed variables under investigation but the absence of co-

integration made us proceed to the unrestricted VAR estimate accordingly.

Table 2: Selection of Lag Criterion following their Respectively Length for all the Models

VAR Lag Order Selection Criteria

Endogenous variables: INFL INTR GDP FD TDF PUDT EXR

Exogenous variables: C

Date: 07/12/17 Time: 17:16

Sample: 1981 2016

Included observations: 34

Lag LogL LR FPE AIC SC HQ

0 -1491.760 NA 4.58e+29 88.16236 88.47661 88.26953

1 -1299.146 294.5864 1.05e+26 79.71447 82.22848* 80.57182

2 -1222.895 85.22118* 3.12e+25* 78.11150* 82.82526 79.71903*

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)

FPE: Final prediction error

AIC: Akaike information criterion

SC: Schwarz information criterion

HQ: Hannan-Quinn information criterion

Source:Extraction from E-view output.

Using the Akaike criterion, the Lag 2 seems to be the most appropriate following the ranking order and

considering the fact that itexhibit a lower coefficient compare to the others. Hence we proceed by using the lag

length 2 in our unrestricted VAR analysis.

INFLt= β0 + β1FDt + Ut -------------- (7) β1 > 0

In absence of co-integration with stationarity at first difference the unrestricted VAR takes the

following form:

(7.2a)

(7.2b)

The rationale behind this modelling is to ascertain the lagged influence of fiscal deficit on inflation

been one of the macroeconomic variable under investigation. The neoclassical economist cited that increase in government deficit will amount to inflationary pressure in the long run while the Keynesian advocate opines that

the government should solve the economic problem in the short run and ignore the long run because in the long

run, we are all dead. This model tends to investigate this argument in the Nigerian context accordingly.





Table 3: Presentation of Vector Auto Regression Estimate Report for Model A

Vector Autoregression Estimates

Date: 07/12/17 Time: 17:37

Sample (adjusted): 1983 2016

Included observations: 34 after adjustments

Standard errors in ( ) & t-statistics in [ ]

INFL FD

INFL(-1) 0.752044 -0.019572

(0.17934) (2.54804)

[ 4.19342] [-0.00768]

INFL(-2) -0.272734 1.546630

(0.17862) (2.53778)

[-1.52692] [ 0.60944]

FD(-1) 0.001814 0.857096

(0.01287) (0.18290)

[ 0.14093] [ 4.68604]

FD(-2) 0.006840 0.197701

(0.01485) (0.21102)

[ 0.46056] [ 0.93689]

C 12.18292 -70.89947

(4.90848) (69.7395)

[ 2.48202] [-1.01663]

R-squared 0.454423 0.829160

Adj. R-squared 0.379172 0.805596

Sum sq. resids 6567.820 1325822.

S.E. equation 15.04914 213.8177

F-statistic 6.038694 35.18743

Log likelihood -137.7247 -227.9540

Akaike AIC 8.395571 13.70318

Schwarz SC 8.620036 13.92764

Mean dependent 19.17255 -343.5739

S.D. dependent 19.09967 484.9435

Determinant resid covariance (dof adj.) 10086546

Determinant resid covariance 7338050.

Log likelihood -365.2337

Akaike information criterion 22.07257

Schwarz criterion 22.52150


The result of the VAR estimate will be discuss using the T-statistic calculated against the tabulated and P-value as reported in the appendix accordingly. At lagged one and two, fiscal deficit exhibit a positive

coefficient of 0.001814 and 0.006840 respectively alongside an insignificant P-value which suggest the

existence of positive and insignificant relationship between inflation been one of the macroeconomic variable

considered under this study and fiscal deficit in Nigeria. The output of this report validate the Neoclassical view

that increase in fiscal deficit will sponsor inflation in the long run and thus increase the debt burden on the

unborn generation as argue by “Lerner’s view”

Summary of findings

This estimation suggest that one percent rise in fiscal deficit is capable of upshooting inflation rate in

Nigeria to the tune of 0.0068 unit and thus concluded that in the Nigerian context, rise in government fiscal

deficit will likely spur inflation in the long run and thus fuel more imbalances in the economy. This is anchored

on the phenomenal that larger public deficits have successfully attracted higher inflation, hence, the trade-offs in

financing the debt through money creation becomes a mirage. In a more practical sense, the report of the central





bank shows that form the first quarter of 2017 till date, interest rate has been pidge at 14% following the rising

trend of government borrowing thereby leaving all other macroeconomic variables like inflation rate exchange

rate and unemployment rate unstable.

INTRt = a0 + a1FDt + Ct -------------- (8) a1 < 0

The above model is recast into a VAR model since we are interested in the lag effect of fiscal deficit on interest

rate as this will enable us discuss our finding.

(8.2a)

(8.2b)

The rationale behind this modelling is to examine the influence of fiscal deficit on interest rate in

Nigeriaas interest rate is one of the key instrument use in the financial market in determining the day to day

transaction. Following the argument of the neoclassical economist, interest rate will respond to government

deficit in a direct manner especially when the deficit is financed through increased borrowing which will further

result into crowding out of private investors. This model seeks to experiment this argument in the Nigerian

context. Table 4: Presentation of Vector Auto Regression Estimate Report for Model B


Date: 07/13/17 Time: 08:07




INTR FD

INTR(-1) 0.380524 -8.108678

(0.17495) (8.38645)

[ 2.17505] [-0.96688]

INTR(-2) 0.322798 15.18266

(0.16842) (8.07364)

[ 1.91658] [ 1.88052]

FD(-1) 0.002505 0.879318

(0.00363) (0.17414)

[ 0.68945] [ 5.04963]

FD(-2) 0.002993 0.196436

(0.00419) (0.20072)

[ 0.71475] [ 0.97865]

C 6.472219 -160.0994

(2.92306) (140.120)

[ 2.21420] [-1.14258]

R-squared 0.594554 0.845145

Adj. R-squared 0.538631 0.823785

Sum sq. resids 522.9899 1201772.

S.E. equation 4.246661 203.5692

F-statistic 10.63155 39.56792

Log likelihood -94.70834 -226.2840

Akaike AIC 5.865196 13.60494

Schwarz SC 6.089661 13.82941

Mean dependent 17.36608 -343.5739

S.D. dependent 6.252061 484.9435





Determinant resid covariance (dof adj.) 747045.7

Determinant resid covariance 543482.2





The result of this estimation validates the neoclassical view. The output shows that at both lag, rise in

fiscal deficit cushion further rise in interest rate such that one percent increase in fiscal deficit is capable of

increasing interest rate to the tune of 0.002 unit as the case may be. This therefore gives an impression of a

direct relationship between government fiscal deficit and interest rate and thus upheld the argument of the

neoclassical economist. At lag 1, FD exhibit a positive coefficient of 0.002505 and at lag 2, a slight increment in

the coefficient occurs such that its amount to 0.002993 suggesting that at both lag, the period of high

government deficit has been followed by the periods of high level of interest rate which has resulted into

crowding out of the private investor and thus fuel unemployment degree in Nigeria.

Summary of Findings

This model has made it clearer that fiscal deficit is capable of fuelling interest rate through the

windows of increase in demand for loanable fund by the government which will amount to a shift in the

loanable fund demand curve upward and thus left interest rate on an increasing pace. The study thereby

conclude that sponsoring fiscal deficit is capable of fuelling interest rate and that the neoclassical view to this

effect holds in the Nigerian context.

GDPt = C0 + C1FDt + Vt -------------- (9) C1 > 0

The above model is further reconstructed into a VAR modelling thus

(9.2a)

(9.2b)

The summary of the Keynesian school lingers on the phenomenal of increasing government spending

to solve the present economic problem as this will result into economic advancement by creation of job

opportunity and increasing aggregate demand. This therefore gives an impression of positive relationship

between economic growth and fiscal deficit. On this premises, this model seek to test this argument in the

Nigerian context and thus make recommendation accordingly.

Table 5: Presentation of Vector Auto Regression Estimate Report for Model C

Vector Auto regression Estimates

Date: 07/13/17 Time: 11:18



Standard errors in ( ) & t-statistics in [ ] GDP FD

GDP(-1) 0.948653 -0.021304

(0.20358) (0.00942)

[ 4.65979] [-2.26237]

GDP(-2) 0.039471 0.006434

(0.17170) (0.00794)

[ 0.22989] [ 0.81014]

FD(-1) -18.06819 0.406537

(4.25050) (0.19661)

[-4.25084] [ 2.06774]

FD(-2) 11.17927 -0.460724

(5.54510) (0.25649)

[ 2.01606] [-1.79625]

C 776.1417 -47.97057





(816.449) (37.7653)

[ 0.95063] [-1.27023]

R-squared 0.986872 0.881150

Adj. R-squared 0.985061 0.864757

Sum sq. resids 4.31E+08 922345.7 S.E. equation 3855.530 178.3396

F-statistic 545.0069 53.75151

Log likelihood -326.2868 -221.7853

Akaike AIC 19.48746 13.34031

Schwarz SC 19.71192 13.56477

Mean dependent 21340.23 -343.5739

S.D. dependent 31544.80 484.9435

Determinant resid covariance (dof adj.) 4.16E+11

Determinant resid covariance 3.03E+11

Log likelihood -545.9029 Akaike information criterion 32.70017



The report in table 5 shows the dynamics relationship between fiscal deficit and growth in Nigeria.

Going by the output of the result, fiscal deficit exhibit a negative coefficient of -18.06819 at first lag. This

thereby suggest that rise in government fiscal deficit could result into fall in economic growth. At lag 2, an

adjustment took place were the coefficient of fiscal deficit exhibit a positive value of 11.17927 and a T-statistics

of 2.016064. This therefore shows that at lag 2, fiscal deficit seems to promote economic growth in Nigeria to

the tune of 11.17927 as the case may be. The true behaviour of fiscal deficit to economic growth can only be

identify depending on the nature of economy absorbing capacity as at when the supplement is introduced.

Summary of findings The responsiveness of fiscal deficit to economic growth is anchored on how the deficit is financed and

the absorbing capacity of the economy as at when the deficit is financed as deficit may not stimulate economic

activities during the time of unemployment.

EXRt = Do + D1PUDTt + D2TDFt + Mt---------- (10) D1 D2 < 0

The above model is converted into a VAR modelling thus

In absence of co-integration with stationarity at first difference the unrestricted VAR takes the following form:

(10.2a)

(10.2b)

(10.3c)

On theoretical bases, trade deficit will result into fall in exchange rate in favour of dollar thereby

increasing the prices of commodity in the nation and thus lead to unfavourable balance of trade and payment.

On the order hand, persistent rise in public deficit will amount to fall in exchange rate in favour of dollar thereby

leaving other macroeconomic variables imbalance. Hence, this model seeks to checkmate the reaction of public deficit and trade deficit to exchange rate in Nigeria.

Table 6: Presentation of Vector Auto Regression Estimate Report for Model D


Date: 07/13/17 Time: 12:37




EXR PUDT TDF

EXR(-1) 0.993749 0.211360 3.365459 (0.20472) (2.19600) (12.2903)

[ 4.85409] [ 0.09625] [ 0.27383]

EXR(-2) 0.014768 -0.397877 8.065041





(0.21967) (2.35635) (13.1877)

[ 0.06723] [-0.16885] [ 0.61156]

PUDT(-1) -0.003737 0.609612 -2.562829

(0.01736) (0.18625) (1.04238)

[-0.21524] [ 3.27310] [-2.45864]

PUDT(-2) 0.010376 0.158630 3.046459

(0.01789) (0.19185) (1.07370)

[ 0.58013] [ 0.82686] [ 2.83734]

TDF(-1) -0.000395 0.082480 1.412840

(0.00270) (0.02892) (0.16187)

[-0.14649] [ 2.85169] [ 8.72803]

TDF(-2) 0.000217 -0.144035 -0.917686

(0.00333) (0.03573) (0.19996)

[ 0.06528] [-4.03137] [-4.58933]

C 5.518646 -14.77985 -89.42237

(3.88910) (41.7170) (233.476)

[ 1.41900] [-0.35429] [-0.38300]

R-squared 0.957626 0.918491 0.863703

Adj. R-squared 0.948210 0.900377 0.833415

Sum sq. resids 5713.880 657442.8 20592925

S.E. equation 14.54734 156.0440 873.3275

F-statistic 101.6981 50.70832 28.51616 Log likelihood -135.3569 -216.0297 -274.5836

Akaike AIC 8.373935 13.11939 16.56374

Schwarz SC 8.688185 13.43364 16.87799

Mean dependent 76.57461 -337.4832 1333.115

S.D. dependent 63.92353 494.3881 2139.730

Determinant resid covariance (dof adj.) 3.17E+12

Determinant resid covariance 1.59E+12



Schwarz criterion 38.78522 Source: Extraction from E-view

The interplay between exchange rate, trade deficit and public deficit is report in table 6 above. The

result shows that at lag 1, public deficit validate our a priori expectation as it exhibit a negative coefficient of -

0.003737 thereby suggesting an inverse relationship to exchange rate. This therefore implies that steady rise in

public deficit is capable of falling exchange rate in favour of dollar thereby downsizing the Nigerian economy.

at lag 2, a paradigm shift occur as the coefficient of public deficit readjust to positive value of 0.01037 thereby

suggesting a positive relationship between exchange rate and public debt in Nigeria. Furthermore trade deficit

also exhibit a negative correlation to exchange rate as it reflect a negative coefficient of -0.000395. The

economic implication of this is that persistent trend of trade deficit will discourage local production patronage

and thus leads to high cost of commodity in the nation. The future implication of this is unfavourable balance of trade and payment and dropped value of exchange rate in favour of dollar.





Test for Model Stability

-20

-15

-10

-5

0

5

10

15

20

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

CUSUM 5% Significance Figure 1:Model Stability Test

Source: EViews 9

The CUSUM tests is used in this study to test for parameter stability, our graph shows that the plots of

the residuals remain within the 5% critical bounds, therefore, we can accept that the parameters of the model are

stable.

IV. CONCLUSION The consequences of deficits depend on how they are financed. As a first step it can be said that each

major type of financing, if used excessively can result in a specific macroeconomic imbalance. For example,

money creation leads to inflation, domestic borrowing leads to credit squeeze probably through higher interest rate or with fixed interest rate through credit allocation and ever more stringent financial repression resulting in

the crowding out of private investment and consumption. External borrowing leads to a current accounts deficit

and appreciation of the real exchange rate and something to a balance of payment crisis if foreign reserve is

drawn down or an external debt crisis if debt is too high.

The report from this study gave more credence to the Neoclassical economist opinion as interest rate,

exchange rate and inflation rate respond to fiscal deficit in an upward shift manner such that rise in fiscal deficit

project a gallop increase in those macroeconomic variables accordingly.

The first model tend to capture the behaviour of inflation rate on fiscal deficit in Nigeria, the result

shows that at both lag, fiscal deficit exhibit a direct relationship to inflation such that a percent rise in FD will

amount to about 0.0068 unit rise in inflation as the case may be. The economic implication of this is that a

persistent increase in fiscal deficit could amount to inflationary pressure in the long run which validate the neoclassical view that increase in fiscal deficit will sponsor inflation in the long run and thus increase the debt

burden on the unborn generation as cited in “Lerner’s view”

Model B tend to justify the interaction between fiscal deficit and interest rate in the Nigerian context.

the report from the output of model B suggest that at both lagged stage, fiscal deficit exhibit a positive

relationship to interest rate such that interest rate react directly to fiscal deficit. Fiscal deficit is capable of

fuelling interest rate through the windows of increase in demand for loanable fund by the government which

will result into a shift in the loanable fund demand curve upward and thus leave interest rate on an increasing

pace.

Model C also seek to examine the influence of fiscal deficit on economic growth as Keynesian

economist report as positive movement. The report form this wing shows that at lag 1, fiscal deficit dampens

economic growth as the study record a negative relationship between FD and GDP. At lag 2, fiscal policy was

reported to have intensified economic growth thereby validating the Keynesian view. Finally, the last model also contributed to the argument by report an inverse relationship between

public deficit, trade deficit and exchange rate at lag one while a paradigm shift occur at lag two where public

deficit and trade deficit respond in a positive manner to exchange rate. The implication of negative trade deficit

on exchange rate is disastrous as it could lead to ever unstable macroeconomic variables in the nation. Having

justifies the behavioural effect of the selected Macroeconomic variables on public deficit in Nigeria; this study





thereby concludes that the contribution of public deficit financed through any means devised by the government

is ephemeral to macro-economy stability in Nigeria.

Although, correlation between deficit, inflation, and interest rate are weak, the result offer strong

evidence that in the medium term, money financing leads to higher inflation and debt financing to higher real

interest rate. As deficit financing mounts, the terms become increasingly unfavourable to the extraction of these

unconventional taxes from the private sector. The evidence refutes the Barro-Ricardian Preposition that consumers react the same to conventional

taxes, unconventional taxes (inflation) and debt financing. The belief that private savings cannot mobilised

through higher debt financing of deficit or financing liberalization seems also to have been rejected. Both result

seems to be in line with the empirical evidence on private savings behaviour common to developing countries.

However, higher interest rate have a negative effect on private investment. This result is consistent with

investment theory, but runs counter to some of the available evidence showing that investment is insensitive to

interest rate in most developing countries. Increasing public investment was found to increase private

investment. This confirms the fact that the net effect of public investment on private is, whether it is

complementary or substitute for private investment. There is also evidence in favour of the hypothesis that fiscal

deficits spill over into external account deficits, leading, in turn to depreciation of the real exchange rate.

Policy Implication

Based on the identified direction of relationship between the variables under investigation, the policy implication of the findings is stated below;

Fiscal Deficit and Growth: The conventional notion that public investment is good for private

investment and growth can be argued with respect to the Nigerian context. Evidence abound that countries that

were forced to shift from external to internal financing of deficits-often because of debt crisis induced by fiscal

mismanagement had poor growth. Growth makes deficit less harmful and can make countries sustain larger

deficit if growth is very strong. But economic collapse exacerbates the macroeconomic effects of deficits as

currently experienced in Nigeria. The virtuous circle between growth and good fiscal management is one of the

strongest arguments for a policy of low and stable fiscal deficits.

Fiscal Deficit, Trade Deficit and Real Exchange Rate: The evidence of the strong relation between

fiscal and external deficits compliment the policy implication that private savings does not offset change in

public savings. Fiscal adjustment is effective in boosting national savings and therefore in increasing trade surplus as well. Exchange rate are driven by fundamentals and not the other way round, which should serve as

the reminder to policy makers that nominal devaluation alone cannot restore macroeconomic balance.

Policymakers must pay close attention to the compensation of government spending when fashioning an

accommodating exchange rate policy.

Fiscal Deficit and Real Interest Rate: Financing deficit through domestic borrowing pushes up real

interest rate, which can easily start a debt spiral leading to a default. If domestic interest rate is controlled

however, the result will be fiscal crisis. High fiscal deficit are correlated with strong negative interest rates, and

the loss of access to external borrowing for financing fiscal deficits often leads to high taxes on domestic

financing intermediation. But the poor economic performance that follows that strong financial repression, as

depressed private credit brings about the collapse of private investment and hardly recommend this solution to

fiscal crisis.

Fiscal Deficit and Inflation: For fiscal deficits financed by money creation, the relationship between deficits and inflation is not arguable. Considering the unfavorable tradeoff between additional inflation and

revenue, however, a fiscal motivation hardly explains chronic high inflation in a country like Nigeria. Where

revenue from the inflation taxes is slight and comes at high cost of macroeconomic instability and high

variability in relative price. Because inflation taxes are a tax, there is no reason to expect adjustment through

inflation to be any less contractionary than conventional fiscal policy adjustment (Dornbusch, Wolf and

Struzenegger 1990).

V. REFERENCES [1] Ali, D. U & Ahmad, U. G (2014). Fiscal deficit and economic growth in Nigeria: a disaggregated approach: JORIND 12 (1)

June, 2014. ISSN 1596-8308. www.transcampus.org/journals; www.ajol.info/journals/jorind

[2] Dornbusch, R., Sturzenegger, F & Wolf, H. (1990). Extreme Inflation: Dynamics and Stabilization. Brookings papers on

economic activity, 2:1990

[3] God’s Time, O. E, Nchege, J. E & Anthony .O (2015). Dynamics of budget deficit and macro-economic fundamentals: further

evidence from Nigeria. International Journal of Academic Research in Business and Social Sciences May 2015, 5(5) ISSN:

2222-6990

[4] Sargent, T& Wallances, N (1985) Interest on reserve. Journal of monetary economics 15(3)

[5] Monogbe, T. G., Achugbu, A. & Davies N. L (2016). Macro-economic Variable and Its Behavioural Effect on Government

Spending in Nigeria (a) (VECM Analysis). American Journal of Management Science and Engineering. 1(1) 2016, pp. 1-7. doi:

10.11648/j.ajmse.20160101.11

[6] Monogbe, T. G & Okah, O. J (2017). Deficit financing in the process of economic development in Nigeria: Saudi Journal of

Business and Management Studies ISSN 2415-6663 (Print)Scholars Middle East Publishers ISSN 2415-6671 (Online)Dubai,

United Arab Emirates 2(3) (Mar,2017):322-329Website: http://scholarsmepub.coDOI: 10.21276/sjbms.2017.2.3.26

http://www.ajol.info/journals/jorind

http://scholarsmepub.co/





[7] Momodu, A. A & Monogbe, T. G (2017). Budget deficit and economic performance in Nigeria: Saudi Journal of Business and

Management Studies ISSN 2415-6663 (Print)Scholars Middle East Publishers ISSN 2415-6671 (Online)Dubai, United Arab

Emirates 2(3)(Mar, 2017):312-321 Website: http://scholarsmepub.coDOI: 10.21276/sjbms.2017.2.3.26

[8] Momodu, A.A & Monogbe, T.G (2017). Structural Factors and Budget Deficits in Nigeria: European journals of business and

management.

[9] Monogbe, T. G., Achugbu A & Davies, N. L.(2016). Macro-economic Variable and Its Behavioural Effect on Government

Spending in Nigeria (a) (VECM Analysis). American Journal of Management Science and Engineering. 1(1), 2016, 1-7. doi:

10.11648/j.ajmse.20160101.11

[10] Monogbe, T.G, Dornubari, I.G., & Emah D.S. (2015). Deficit finance and the Nigeria economic performance: International

Journal of Advanced Academic Research | Social Sciences and Education | 1(3) (December)

[11] Onuorah & Ogbonna (2014). Deficit financing and the growth of Nigeria economy: International Journal of Management

Sciences and Business Research, 2013 ISSN (2226-8235) 3(2)

[12] Oyeleke, O. J & Ajilore, O. T (2014). Analysis of fiscal deficit sustainability in Nigeria the Nigerian economy: error correction

approach. Asian Economic and Financial Review, 2014, 4(2):199-210

[13] Wosowei, E. (2013). Fiscal deficit and macroeconomic aggregate in Nigeria. Kuwait Chapter of Arabian Journal of Business

and Management Review. 2(9) May, 2013

[14] Yunana, T. W & Amba, D. A (2015). Impact of fiscal deficit on macroeconomics variables in Nigeria: European Journal of

Business and Management www.iiste.orgISSN 2222-1905 (Paper) ISSN 2222-2839 (Online).7(34) 2015

Appendix

Model A

System: UNTITLED

Estimation Method: Least Squares

Date: 07/12/17 Time: 22:13

Sample: 1983 2016 Included observations: 34

Total system (balanced) observations 68

Coefficient Std. Error t-Statistic Prob.

C(1) 0.752044 0.179339 4.193422 0.0001

C(2) 0.001814 0.012873 0.140934 0.8884

C(3) -0.272734 0.178617 -1.526922 0.1322

C(4) 0.006840 0.014852 0.460562 0.6468

C(5) 12.18292 4.908477 2.482016 0.0160 C(6) -0.019572 2.548041 -0.007681 0.9939

C(7) 0.857096 0.182904 4.686037 0.0000

C(8) 1.546630 2.537782 0.609441 0.5446

C(9) 0.197701 0.211017 0.936894 0.3527

C(10) -70.89947 69.73948 -1.016633 0.3136

Determinant residual covariance 7338050.

Equation: INFL = C(1)*INFL(-1) + C(2)*FD(-1) + C(3)*INFL(-2) + C(4)*FD(-

2) + C(5)

Observations: 34

R-squared 0.454423 Mean dependent var 19.17255

Adjusted R-squared 0.379172 S.D. dependent var 19.09967

S.E. of regression 15.04914 Sum squared resid 6567.820

Durbin-Watson stat 1.923639

Equation: FD = C(6)*INFL(-1) + C(7)*FD(-1) + C(8)*INFL(-2) + C(9)*FD(-2)

+

C(10)

Observations: 34

R-squared 0.829160 Mean dependent var -343.5739


S.E. of regression 213.8177 Sum squared resid 1325822. Durbin-Watson stat 1.991757

http://scholarsmepub.co/

http://www.iiste.org/





Model B

System: UNTITLED


Date: 07/13/17 Time: 08:14

Sample: 1983 2016 Included observations: 34



C(1) 0.380524 0.174950 2.175047 0.0337

C(2) 0.002505 0.003633 0.689446 0.4933

C(3) 0.322798 0.168424 1.916576 0.0602

C(4) 0.002993 0.004187 0.714746 0.4776

C(5) 6.472219 2.923055 2.214196 0.0308

C(6) -8.108678 8.386451 -0.966878 0.3376 C(7) 0.879318 0.174135 5.049627 0.0000

C(8) 15.18266 8.073644 1.880521 0.0651

C(9) 0.196436 0.200722 0.978650 0.3318

C(10) -160.0994 140.1205 -1.142584 0.2579

Determinant residual covariance 543482.2

Equation: INTR = C(1)*INTR(-1) + C(2)*FD(-1) + C(3)*INTR(-2) + C(4)*FD(

-2) + C(5) Observations: 34

R-squared 0.594554 Mean dependent var 17.36608 Adjusted R-squared 0.538631 S.D. dependent var 6.252061



Equation: FD = C(6)*INTR(-1) + C(7)*FD(-1) + C(8)*INTR(-2) + C(9)*FD(-2)

+ C(10)

Observations: 34



S.E. of regression 203.5692 Sum squared resid 1201772.


Model C

System: UNTITLED


Date: 07/13/17 Time: 11:19

Sample: 1983 2016




C(1) 0.948653 0.203583 4.659788 0.0000

C(2) 0.039471 0.171698 0.229887 0.8190

C(3) -18.06819 4.250498 -4.250842 0.0001

C(4) 11.17927 5.545099 2.016064 0.0484

C(5) 776.1417 816.4485 0.950631 0.3457

C(6) -0.021304 0.009417 -2.262371 0.0274

C(7) 0.006434 0.007942 0.810141 0.4212

C(8) 0.406537 0.196609 2.067741 0.0431





C(9) -0.460724 0.256492 -1.796254 0.0777

C(10) -47.97057 37.76526 -1.270230 0.2091

Determinant residual covariance 3.03E+11

Equation: GDP = C(1)*GDP(-1) + C(2)*GDP(-2) + C(3)*FD(-1) + C(4)*FD(-2)

+ C(5)

Observations: 34



S.E. of regression 3855.531 Sum squared resid 4.31E+08


Equation: FD = C(6)*GDP(-1) + C(7)*GDP(-2) + C(8)*FD(-1) + C(9)*FD(-2) +

C(10)

Observations: 34



S.E. of regression 178.3396 Sum squared resid 922345.7 Durbin-Watson stat 2.192484

Model D

System: UNTITLED


Date: 07/13/17 Time: 12:50

Sample: 1983 2016




C(1) 0.993749 0.204724 4.854088 0.0000

C(2) 0.014768 0.219672 0.067226 0.9466

C(3) -0.003737 0.017363 -0.215238 0.8301

C(4) 0.010376 0.017885 0.580134 0.5634

C(5) -0.000395 0.002696 -0.146495 0.8839

C(6) 0.000217 0.003331 0.065278 0.9481

C(7) 5.518646 3.889103 1.419002 0.1597

C(8) 0.211360 2.196000 0.096248 0.9236 C(9) -0.397877 2.356345 -0.168854 0.8663

C(10) 0.609612 0.186249 3.273100 0.0016

C(11) 0.158630 0.191847 0.826858 0.4107

C(12) 0.082480 0.028923 2.851689 0.0055

C(13) -0.144035 0.035729 -4.031366 0.0001

C(14) -14.77985 41.71698 -0.354289 0.7240

C(15) 3.365459 12.29030 0.273831 0.7849

C(16) 8.065041 13.18770 0.611558 0.5425

C(17) -2.562829 1.042377 -2.458640 0.0161

C(18) 3.046459 1.073704 2.837337 0.0057

C(19) 1.412840 0.161874 8.728028 0.0000

C(20) -0.917686 0.199961 -4.589328 0.0000 C(21) -89.42237 233.4764 -0.383004 0.7027

Determinant residual covariance 1.59E+12





Equation: EXR = C(1)*EXR(-1) + C(2)*EXR(-2) + C(3)*PUDT(-1) + C(4)

*PUDT(-2) + C(5)*TDF(-1) + C(6)*TDF(-2) + C(7)

Observations: 34



S.E. of regression 14.54734 Sum squared resid 5713.879 Durbin-Watson stat 2.030969

Equation: PUDT = C(8)*EXR(-1) + C(9)*EXR(-2) + C(10)*PUDT(-1) + C(11)

*PUDT(-2) + C(12)*TDF(-1) + C(13)*TDF(-2) + C(14)

Observations: 34





Equation: TDF = C(15)*EXR(-1) + C(16)*EXR(-2) + C(17)*PUDT(-1) + C(18)

*PUDT(-2) + C(19)*TDF(-1) + C(20)*TDF(-2) + C(21)

Observations: 34

R-squared 0.863703 Mean dependent var 1333.115 Adjusted R-squared 0.833415 S.D. dependent var 2139.730

S.E. of regression 873.3275 Sum squared resid 20592926


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