Fiscal Policy and Term Structure of Interest Rate in Nigeria

Oseni O. Isiaq () and Adesoye A. Bolaji ()
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Oseni O. Isiaq: Olabisi Onabanjo University
Adesoye A. Bolaji: Olabisi Onabanjo University

Acta Universitatis Danubius. OEconomica, 2016, issue 12(2), 70-83

Abstract: The study examines the effects of fiscal policy on term structure of interest rate in Nigeria between 1981 and 2014. The paper built on the fact that continuous increase in fiscal deficit in Nigeria has not translated into equal change in term structure of interest rate as proposed by the economic theory. Using secondary annual time series data which are obtained from Central Bank statistical bulletin, 2014, the paper employed appropriate econometric techniques such unit-root test, Johansen Co-integration technique, Error Correction Mechanism and Fully Modified Ordinary Least Squares. The paper shows that fiscal deficit has a positive and significant effect on term structure of interest rate in Nigeria and concludes that consumers are not forward-looking in Nigeria as proposed by Ricardian Equivalence Hypothesis theory. Consumers in Nigeria increase their consumptions has government employed expansionary fiscal policy which may reduce the savings and investment. Consequently, reduces growth. Thus, the implication is that fiscal deficit could responsible for the uncertainties and inconsistencies in the term structure of interest rates in Nigeria.

Keywords: Fiscal Deficit; Long-Term Interest Rate; Short-Term Interest Rate; Fully Modified Ordinary Least Squares; Cointegration and ECM. (search for similar items in EconPapers)
Date: 2016
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