EMPIRICAL INVESTIGATION BETWEEN BUDGET DEFICIT, INFLATION AND MONEY SUPPLY IN NIGERIA
Journal Title: European Journal of Business and Social Sciences - Year 2014, Vol 2, Issue 12
Abstract
The paper critically investigates the long term relationship between budget deficit, money supply and inflation in Nigeria between 1975 and 2012. The paper employs quantitative methodological framework and specifically draws on econometric technique to find the relationship between inflation rate, growth rate of money supply, growth of budget deficit/GDP and growth of external debt/GDP. Stationarity test conducted using Augmented Dickey-Fuller (ADF) reveals that the variables used are stationary at levels. The Johansen co-integration test suggests that there are at least three co-integrating vectors among these variables. The estimated coefficient of the ECM reveals that about 132% of the errors in the short run are corrected in the long run. The overall result between inflation rate and growth of money supply, growth of BD/GDP and growth of ED/GDP indicates that the specified model is statistically significant at 5% level. By implication, the model is of goodness of fit i.e. reliable for policy making. However, the paper recommends that the Nigerian government should demonstrate a high sense of transparency in its monetary and fiscal operations in order to curb high prevalence of money supply and external debt, money supply in order to reduce the incidence of inflation in Nigeria. The main contribution of this work to knowledge lies in illuminating the theoretical and empirical linkages between budget deficit, money supply and inflation; which was inadequately investigated in previous studies. The linkages enhance our understanding about various interpretations which have shaped budget deficit, inflation and other macroeconomic variables both in theory and practice.
Authors and Affiliations
Ibrahim A. O. BAKARE| (Corresponding Author) Department of Economics, Faculty of Social Sciences, Lagos State University, Ojo Campus, PMB 0001, E-mail: bakgiit@yahoo.com, O. A. ADESANYA| Faculty of Social Sciences, Lagos State University, Ojo Campus, PMB 0001, LASU Post Office, Lagos. Nigeria. Email:adesanya_oyindamola@yahoo.com, S. A. Bolarinwa| Department of Accounting and Finance, Faculty of Management Sciences, Lagos State University, Ojo Campus, PMB 0001, LASU Post Office, Lagos. Nigeria. E-mail:sehilatabike@gmail.com
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