Impact of Budget Deficit Financing on Money Demand in Nigeria

Abstract

The study empirically investigates the impact of budget deficit financing on money demand in Nigeria with an objective of finding the effect of budget deficit financing indicators such as external debt financing, domestic debt as well as debt servicing on money demand. The study is modeled using a framework of Keynesian theory of budget deficit financing and Richadian Equivalent hypothesis. The study adopted an auto redistributive lag model (ARDL) which shows the existence of long run relationship between money demand and indicators of financing budget deficit and ordinary Least Square. The general findings revealed that external source of financing budget deficit, internal source of financing budget deficit as well as debt servicing has a significant effect on money demand in the Nigerian context. Base on this findings, the study recommend that external and internal source of financing deficit should be encouraged for effective demand leading to economic stability reasons and not for political reasons and it should be properly channeled to productive sector of the economy that will enhance economic stability.