Effectiveness of Deficit Financing in Stimulating Gross Domestic Output: Insights from the Nigerian Economy (1970 - 2014)

Abstract

A lot of studies have been conducted in the Nigerian economy on deficit financing but there exist contrasting views as to whether deficit financing stimulate economic growth or not. This study employed the ordinary least square technique (OLS) to examine the effectiveness of deficit financing in stimulating economic growth in Nigeria and also tested for causality using the granger causality pair wise test. The variables employed were real GDP as the dependent variable while deficit financing, the current account balance, foreign private investments, and savings were the explanatory variables. The granger causality test result indicates a unidirectional causality flow from GDP to deficit financing, to current account balance, foreign private investment and savings. The empirical findings also revealed that deficit financing has a positive but not significant impact on real GDP, which is in line with the Ricardian Equivalence Theory. Therefore, deficit financing had no impact on economic growth in Nigeria for the period under review. The study recommends that deficit financing, should only be adopted for financing long-term capital project. Foreign private investment should be promoted and policies aimed at savings mobilization should be enacted by the government.