The Effect of Fiscal Deficit on Investment in Nigeria

Kasali Nurudeen Olanipekun
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Kasali Nurudeen Olanipekun: University of Ilorin, Ilorin, Kwara State., Postal: Department of Economics., http://unilorineconsworkingpapers.com.ng/

No 3, Working Papers from Department of Economics, University of Ilorin

Abstract: Investment has been identified as a major factor in the economic growth and development, and by extension, contributes to high rate of employment, productivity, capital formation, improved technology and poverty reduction. However, the effect of fiscal deficit on investment has been a controversial issue in Nigeria. For this reason, this study generally investigates the effect of fiscal deficit on investment in Nigeria, and specifically, to determine the effect of fiscal deficit on private domestic investment, the effect of fiscal deficit on foreign direct investment and to determine the relationship between private domestic investment and public investment in Nigeria between the periods 1980-2015. The study adopts neoclassical theory of investment of Dale Jorgenson’s approach, using macroeconomic data from 1980-2015. It employs Dickey Fuller Generalized Least Square (DFGLS) and Ng-Perron unit root tests, and ARDL Bounds testing approach to cointegration for the estimation techniques. The econometric evidence indicates that fiscal deficit has a negative effect on private domestic investment in the short. However, fiscal deficit has positive effect on foreign direct investment in the long run. Public investment and private domestic investment are autonomous in Nigeria. Following the findings, the study recommends that federal government should finance budget deficit through money creation.

Keywords: fiscal deficit; private domestic investment; foreign direct investment; public investment. (search for similar items in EconPapers)
JEL-codes: E22 E62 F21 H54 H62 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-02-26
New Economics Papers: this item is included in nep-mac
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