Estimation of Effects and the Threshold of Fiscal Deficit Financing for the Nigerian Economy:An Econometric Re-evaluation of Recent Trends

• Main Authors: David Umoru, Godsent Akhabue
• Format: Article
• Language: English
• Published: Ishik University 2017-12-01
• Series: International Journal of Social Sciences & Educational Studies
• Subjects: Fiscal Deficit Financing; Output Growth; Threshold Value; Nigeria JEL Classification: E28; O46; A32
• Online Access: http://ijsses.org/wp-content/uploads/2017/12/ESTIMATION-OF-EFFECTS-AND-THRSHOLD-OF-FISCAL-DEFICIT-FINANCING-1.pdf

The study uses an instrumental variable estimator to econometrically re-estimate effects of fiscal deficit financing on output growth rate plus the threshold value of such deficit financing that is consistent with growth rate of national output in Nigeria based on a system specification and theThreshold Autoregressive (TAR) specification. Estimations were done with quarterly data from 2010:Q1 to 2017: Q2. Results of likelihood ratio test validated existence of threshold effect and this implies that link between fiscal deficit financing and long-run output growth is non-linear in Nigeria while empirics of threshold autoregressive results evidently upholds that changes in fiscal deficit negatively impact output growth exclusively if such deficit financing exceeds 3% of GDP. By implication, fiscal deficit financing that exceeds 3% of GDP injures output growth in Nigeria. In effect, 3% is the threshold at which the sign of existing link between fiscal deficit financing and output growth switches. At threshold of 4% and above, the link becomes negative. Henceforward, the Nigerian monetary authority (CBN) can be so advised to target not more than 3% fiscal deficit financing for determination of output growth while simultaneously reduce lending rate to boost domestic investment that links local production required to boost exportation and so generate the requisite foreign exchange desirable to steer economic growth.