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

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  • Ibrahim, Taofik

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.

Suggested Citation

  • Ibrahim, Taofik, 2017. "Budget deficit-money demand nexus in Nigeria: A myth or reality?," MPRA Paper 86265, University Library of Munich, Germany, revised 09 Nov 2017.
    • Handle: RePEc:pra:mprapa:86265
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    References listed on IDEAS

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    More about this item

    Keywords

    Budget Deficit; Money Demand; Error Correction Model (ECM); Nigeria;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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