Crowding-Out and Crowding-In Effects of Public Borrowing on Private Domestic Investment in Nigeria

Mathias A. Chuba
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Mathias A. Chuba: Department of Economics, Achievers University Owo, Km 1, Idasen-Ute Road, P. M. B. 1030, Ondo State, Nigeria

International Journal of Research and Innovation in Social Science, 2021, vol. 5, issue 11, 439-448

Abstract: Monetarists believe that public domestic borrowing crowds-out private domestic investment (PDI) and Keynesians believe that it does not crowd-out PDI. Most previous studies focused on the crowding-out effect of public spending on PDI but the point of contention between monetarists and Keynesians is the effect of increased public domestic borrowing on PDI. The results of the previous investigation that public domestic borrowing crowded-in and public external borrowing crowded-out private domestic investment in Nigeria are questionable. In view of the above stated problems, this paper determined the effect of public borrowing on PDI in Nigeria from 1986 to 2019 using a vector error correction model. The results of the investigation showed that public domestic borrowing drove-up interest rate. PDI was found to be negatively related to interest rate. Domestic credit provided by banks is positively related to interest rate. Public domestic borrowing crowded-out and public external borrowing crowded-in PDI. This paper suggests that instead of borrowing money from internal sources, the government should borrow money from external sources to finance the federal budget deficits in order to increase PDI in Nigeria.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bcp:journl:v:5:y:2021:i:11:p:439-448

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