Budget deficit-money demand nexus in Nigeria: A myth or reality?

Taofik Ibrahim

MPRA Paper from University Library of Munich, Germany

Abstract: Budget deficit has an implication for monetary policy formulation and thus aggregate macroeconomic performance. An important question often asked is whether an increase in budget deficit is able to change the money market equilibrium. In order to answer this question, this paper investigates empirically the sensitivity and validity of the Keynesian and Neoclassical propositions and the Ricardian equivalence hypothesis. The study utilized cointegration analysis and ECM methodology to ascertain the short and long-run effect of budget deficit on money demand. The results of the cointegration test confirmed the existence of a strong and stable long-term relationship among the variables in the money demand model. Also, the estimates of the ECM model indicate the existence of a short- and long-term, positive and significant relationship between money demand and budget deficit suggesting that the Keynesian and Neoclassical views hold for Nigeria. Therefore the study suggests that there should be increased emphasis on productivity and efficiency of government expenditure since it impacts positively on aggregate money demand via increase in aggregate demand.

Keywords: Budget Deficit; Money Demand; Error Correction Model (ECM); Nigeria (search for similar items in EconPapers)
JEL-codes: E41 H62 (search for similar items in EconPapers)
Date: 2017-07-03, Revised 2017-11-09
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:86265

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