Wednesday, January 20, 2010

BUDGET DEFICIT AND MACROECONOMIC PERFORMANCE OF NIGERIA, 1970-2006

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The relationship between budget deficits and macroeconomic variables (such as growth, interest rates, trade deficit, exchange rate, among others) represents one of the most widely debated topics among economists and policy makers in both developed and developing countries (Saleh, 2003). This relationship can either be negative, positive or a no positive or negative relationship. The differences on the nature of the relationship between budget deficits and these macroeconomic variables as found in economic literatures could be explained by the methodology, the country and the nature of the data used by the different researchers. Most of the studies regress a selected macroeconomic variable on the deficit or the deficit on the macroeconomic variables.
Among the studies that support a negative relationship between budget deficits and macroeconomic variables include: Premchard (1984). He asserts that budget deficit implies an increase in the supply of government bonds. In order to improve the attractiveness of these bonds the government offers them at a lower price, which leads to higher interest rates. The increase in interest rates discourages the issue of private bonds, private investment, and private spending. In turn, this contributes to the financial crowding out of the private sector. Also, these literatures {e.g. Metzler (1951); Patinkin (1965); Friedman (1968); Sargent and Wallace (1981); Dywer (1982); Miller (1983), among others} have argued that government deficit spending is a primary cause of inflation. Some of these studies, such as Sargent and Wallace (1981), have supported the proposition that the Central Bank will be obliged to monetize the deficit either now or later periods. Such monetization results in an increase in the money supply and the rate of inflation, at least in the long run period
While other literatures that argue a positive relationship between budget deficits and macroeconomic variables include; Aschauer (1989); Heng (1997); among others}. They argued that higher investment may raise the marginal productivity of private capital and thereby crowd-in private investment. Some of these studies, such as Aschauer (1989), argue that public capital, infrastructure capital such as highways, water systems, sewers, and airports, is likely to bear a complimentary relationship with private capital. For examples, in a Mundell-Fleming framework, Fleming (1962); Mundell (1963); it is argued that an increase in the budget deficit would induce upward pressure on interest rates, causing capital inflows and an appreciation of the exchange rate that will increase the current account deficit.
However, some literatures that believe that budget deficits have no positive or negative relationship with macroeconomic variables include; Barro (1989). In his model known as the ‘Ricardian Equivalence Hypothesis’ (REH), he states that shifts between taxes and budget deficits do not matter for the real interest rate, the quantity of investment, or the current account balance. He argues that the value of the new debt (deficits) is simply perceived as the present value of the future tax liabilities. This means that the government deficits are not viewed as net wealth, and as a result, money demand would not be affected. Consequently, interest rates, and other macroeconomic variables remain unchanged as well.
However, other literatures {e.g. Allen (1977); Penati (1983); Bisignano and Hoover (1982); Branson (1985); Hakkio (1996); Stoker (1999); among others} has concentrated on the relationship between the budget deficit and the exchange rate. Some of these studies, such as Bisignano amd Hoover (1982), argue that deficits may appreciate or depreciate the exchange rate, depending on the relative importance of wealth effects and relative asset substitution effects.
Finally, to the best of my knowledge, no literature exists in Nigeria on the relationship between budget deficits and macroeconomic variables. This research work is meant to fill the gap and also find out whether the Nigerian economy agrees with any of these schools of thought, given the methodology implored and the data. The debate continues.

1.2 STATEMENT OF THE PROBLEM
It is important to note that budget deficits have many implications for the macro economy. However, this will depend on the level of employment. However, in a situation of full employment is; excessive deficits will bring about macroeconomic imbalances. Generally, large and persistent fiscal deficits usually contribute to macroeconomic instability. Overall, it will adversely affect output growth and raise inflationary pressures in the economy. This is because it increases the reserve base of commercial and merchant banks, thereby creating excess liquidity in the financial system. Furthermore, deficits bring about a reduction of loanable funds that are available to the private sector. Specifically, it will crowd out private investment in the real sector, private savings, result to low growth and intensive inflationary pressures, current account deficits, real exchange rate appreciation, and external debt crisis if he debt is unsustainable. However, in a situation of less than full employment, budget deficits could contribute to growth as a result of the ideal capacities that are being employed in the economy. If the deficits are channeled into investment in productive activities such as capital goods, training or new technology, the economy might grow faster than the burden of the debt. This is because the investment will lead to long-term growth. Therefore, deficits could lead to the achievement of macroeconomic stability and growth. This condition holds, if the size of the overall deficit is about 3 percent of the Gross Domestic product (GDP), Gbosi, 2004.
Available evidence shows that over the years under review (1970-2006), Nigeria’s fiscal operations have resulted in persistent overall deficit. It recorded thirty yearsof deficits . Deficits are meant to accerlerate economic activities during depression through induced aggregate demand.
Despite the fact that Nigeria has been operating deficits for these periods and also found itself in a situation of less than full employment, her economy has been in distress, the opposite view of the essence of deficits occur. There were obvious fall in the standard of living of the citizens, decline in the growth of the economy, persistent unfavouarable balance of payment, increased public debt; local and foreign, continued depletion of the foreign reserve, little or no savings, decline in exports, increased inflationary pressure, continous dependence on external economies etc.
All these are indicators of negative growth, its impact on these macroeconomic variables has been unfavourable, one then asks if budget deficits no longer stimulate economic growth. Do we believe the Keynesian economists that it crowds-in private investments through its impact on macroeconomic variables or the neoclassical economists that it crowds-out private investment through its impact on interest rate and other variables, or even the Ricardian economists that it has no positive or negative impact on aggregate demand? Which side to belong is what this research work is meant to address.
1.3 OBJECTIVE OF THE STUDY
The objective is to find the long-run relationship between government budget deficit and some macroeconomic variables like exchange rate, interest rate, GDP, and inflation rate.
1.4 HYPOTHESIS OF THE STUDY
H0: Budget deficits have no significant impact on the macroeconomic performance of Nigeria.
H1: Budget deficits exert significant impact on the macroeconomic performance of Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
To the policy makers, it will give them an overview on the nature of the relationship between budget deficits and the macroeconomic variables, which will enable them in the formulation of policies that will help achieve the development objectives of the economy with minimal conflicts. The predictions will help them in determining the stance of monetary policy as well as fiscal policy. They may take a cue from these studies; and necessarily keep themselves watchful of the changes in the macroeconomic fundamentals.
To the government, it will enable them to review economic conditions for the past year against its policies within the same period and equally afford them the opportunity to introduce fiscal and monetary policy changes for the coming financial year.
To the students and fellow researchers, this study will serve as a resource material and an addition to the existing stock of knowledge as regards to the relationship. It will equally serve as a base upon which further research can be continued from.
1.6 SCOPE OF THE STUDY
This study covers the budget deficits as it relates with few selected macroeconomic variables in Nigeria. These selected macroeconomic variables include: exchange rate, interest rate, inflation rate, and GDP. The period of study covers from 1970-2006.
1.7 LIMITATIONS OF THE STUDY
As at the time of this study, I had difficulties in assessing related works done in Nigeria in this area of interest. Though, I speculate that other scholars may have written on this area, but to the best of my knowledge and within the limits of my assessment, no work exists in this area. Therefore, 95% of the literatures, empirical and theoretical are foreign. Also, combining this research work with my classroom work was limiting the time devoted to the work. I also had financial constraints and most importantly, the data and quality cannot be guaranteed by me as it is a secondary time-series data from CBN.
1.8 DEFINITIONS OF CONCEPTS
Debt stock disturbances: This includes the disturbances resulting from the deficits.
Deficit financing is defined as a situation in which government spending is in excess of her expenditure over time.
Closed economy: It is an economy with no international trade
Portfolio crowding out: This happens when excessive budget deficit retards or reduces investments.
Stationarity: A series is said to be (weakly or covariance) stationary if the mean and autocovariances of the series do not depend on time. Any series that is not stationary is said to be nonstationary.
1.9 ORGANIZATION OF THE STUDY
This empirical study is divided into five chapters and, each of which is further sub-divided. The first chapter is introduction. These include: the introduction, background of the study, statement of the problem, objective of the study, hypothesis of the study, significance of the study, scope of the study, limitations of the study, definitions of concepts, and organization of the study.
In the second chapter, relevant theoretical and empirical literatures are reviewed.
Chapter three is the methodology. The researcher’s model is stated. The sources of the data and their description, the estimation procedure are all stated.
Chapter four shows the presentation, analysis and interpretation of results.
The fifth chapter is the concluding part of the work, under which the researcher states the summary of findings, policy recommendation and conclusion.















CHAPTER TWO
LITERATURE REVIEW
The purpose of this section is to review the theoretical framework and other literatures concerning budget deficit and macroeconomic performance. These macroeconomic variables include exchange rate, inflation, money supply, trade deficits, GDP, interest rates, savings and investment etc.
2.1.0 THEORITICAL FRAMEWORK
BUDGET DEFICITS, CROWDING IN AND CROWDING OUT EFFECTS
SCHOOLS OF THOUGHT
In analyzing the literatures on the relationship between budget deficits and macroeconomic performance, one finds three distinct schools of thought. These are the neoclassical, Keynesian, and Ricardian schools, each providing different paradigms. Bernhein (1989) provides a brief summary of the three paradigms.
2.1.1 THE NEOCLASSICAL SCHOOL
The neoclassical school proposes an adverse relationship between budget deficits and macroeconomic variables. They argue that budget deficits lead to higher interest rates, discourages the issue of private bonds, private investments, and private spending, increases inflation level, and cause a similar increase in the current account deficits and finally slows the growth rate of the economy through resources crowding out.
The Neoclassical school considers individuals planning their consumption over their entire cycle. By shifting taxes to future generations, budget deficits increase current consumption. By assuming full employment of resources the neoclassical school argues that increased consumption implies a decrease in savings. Interest rate must rise to bring equilibrium in the Capital markets. Higher interest rates, in turn, result in a decline in private investment, domestic production and an increase in the aggregate price level. Furthermore, Yellen (1989) argues that in standard Neoclassical Macroeconomic models, if resources are fully employed, so that output is fixed, higher current consumption implies an equal and offsetting reduction in other forms of spending. Thus, investment and/or net exports must be “fully crowding out”. It is worth noting that it is important to distinguish between “financial” crowding out and “resource” crowding out which occurs when the government competes with the private sector on purchasing certain resources (skilled labour, raw materials and so on). When the government sector expands, the private sector will contract because of the increase in prices on these resources due to an excess demand by the government, hence this leads to a fall in investment and consumption by the private sector. Thus the government sector’s expansion crowds out the private sector. It is worth noting here as well that resource crowding out is an important issue to take into account especially in developing countries where resources are scarce even sometimes to the private sector, so any excess demand for these resources by the government will severely impinge on private sector productivity.
2.1.2 THE KEYNESIAN SCHOOL
The Keynesian economists propose a positive relationship between budget deficits and macroeconomic variables. They argue that usually budget deficits result in an increase in domestic production, increases aggregate demand, increases savings and private investment at any given level of interest rate. The Keynesian absorptive theory suggests that an increase in the budget deficits would induce domestic absorption and thus, import expansion, causing current account deficit. In the Mundell-Fleming framework, an increase in the budget deficit would induce an upward pressure on interest rate, causing capital inflows and an appreciation of the exchange rate that will increase the current account balance.
The Keynesians provide a counter argument to the crowd-out effect by making reference to the expansionary effects of budget deficits. They argue that usually budget deficits result in an increase in domestic production, which makes private investors more optimistic about the future course of the economy resulting in them investing more. This is known as the “crowding-in” effect. It is worth noting here that the traditional Keynesian view differs from the standard neoclassical paradigm in two fundamental ways. First, it permits the possibility that some economic resources are unemployed. Second, it presupposes the existence of a large number of liquidity-constrained individuals. This second assumption guarantees that aggregate consumption is very sensitive to changes in disposable income. Many traditional Keynesians argue that deficits need not crowd out private investment. Eisner (1989) suggests that increased aggregate demand enhances the profitability of private investments and leads to a higher level of investment at any given rate of interest. Hence deficits may stimulate aggregate savings and investment, despite the fact that they raise interest rates. He concludes that “evidence is thus that deficits have not crowded-out investment. There has rather been crowding-in”. Heng (1997) utilized an overlapping-generations (OLG) model to provide a theoretical framework to analyze the “crowding-in” issue of private capital by public capital. He shows that public capital crowds-in private capital through two channels, namely, via its impact on the marginal productivity of labour and savings, and via (gross) complementarity/substitutability between public and private capital.
2.1.3 THE RICARDIAN SCHOOL
Finally, there is another contrary approach advanced by Barro (1989) known as the Ricardian Equivalence Hypothesis (REH). Ricardian equivalence, or the Barro-Ricardo equivalence proposition, is an economic theory which suggests that government budget deficits do not affect the total level of demand in an economy. It was initialy proposed by the 19th century economist David Ricardo. In simple terms, the theory can be described as follows. Governments may either finance their spending by taxing current taxpayers, or they may borrow money. However, they must eventually repay this borrowing by raising taxes above what they would otherwise have been in future. The choice is therefore between "tax now" and "tax later". Suppose that the government finances some extra spending through deficits - i.e. tax later. Ricardo argued that although taxpayers would have more money now, they would realize that they would have to pay higher tax in future and therefore save the extra money in order to pay the future tax. The extra saving by consumers would exactly offset the extra spending by government, so overall demand would remain unchanged. More recently, economists such as Robert Barro have developed more sophisticated variations on the same idea, particularly using the theory of rational expectations. Ricardian Equivalence suggests that government attempts to influence demand using fiscal policy will prove fruitless. He argues that an increase in budget deficits, due to an increase in government spending, must be paid for either now or later, with total present value of receipts fixed by the total present value of spending. Thus, a cut in today’s taxes must be matched by an increase in future taxes, leaving real interest rates, and thus private investment, and the current account balance, exchange rate and domestic production unchanged. Therefore, budget deficits do not crowd-in nor crowd out macroeconomic variables i.e. no positive or negative relationship exists.
2.2 EMPIRICAL LITERATURE
Dwyer (1982) studied the relationship between budget deficits and macroeconomic performance of US using vector autoregressive model (VAR) for the period 1952-1978. He found no evidence that larger government deficits increase prices, spending, interest rates, or the money stock. Karras (1994) studied the relationship between budget deficits and macroeconomic variables in a Cross-sectional study involving 32 countries for the period 1950-1980, using OLS and GLS. He found out that Deficits do not lead to inflation, they are negatively correlated with the rate of growth of real output and increased deficits appear to retard investment. Al-Khedir (1996) studied the relationship between budget deficits and macroeconomic performance of the G-7 countries for the period 1964-1993 using VAR. He found out that budget deficits led to higher short-term interest rates in the 7 countries. However, the deficits did not manifest any impact on the long-term interest rates. The trade balance was worsened by the budget deficit and economic growth improved in all 7 countries.
Guess and Koford (1984) used the Granger Causality test to find the causal relationship between budget deficits and inflation, GNP and private investment using annual data for seventeen OECD countries for the period 1949 to 1981. They concluded that budget deficits do not cause changes in these variables.
Barro (1990; 1991) studied the effects of tax financed government expenditure on investment and output in a cross-sectional study of 98 countries over the period 1960-85. He found that the ratio of real government consumption to real GDP (gc/y) had a negative association with growth and investment. The argument was that government consumption had no direct effect on private productivity, but lowered savings and growth through the distorting effects from taxation or government-expenditure programs. It is worth noting that the rearcher measured the ratio of real public gross investment to GDP (gi/y). This public investment corresponds to a stock of public capital kg, which generates a flow of services that he views as comparable to the productive services g. Hence, this empirical measure identifies g with “infrastructure services”, such as transportation, water, electric power, and so on (although hospitals and schools are also components of public capital). In addition, the assumptions in this study are: (a) g/y is constant over time for a single country
(b) the public and private capital has the same depreciation rates.
According to the theory the relationship of the growth rate y to gi /i depends on how the government behaves. If governments optimize (go close to the point of maximal growth), y and gi /i would indicate cross-sectional correlation. On the other hand, the association would be positive (or negative) if governments typically choose too little or too much productive public services. This study, by dividing tax-financed government expenditure into spending on unproductive services and (e.g., consumption, subsidizing food) and spending on productive services (e.g., building infrastructure etc,), found that the spending on services affects growth negatively, while spending on productive services affects growth positively.
2.2.1 BUDGET DEFICITS (BD) {N million}
In 1970, budget deficit was -455.1, i.e. -8.8% of GDP. But in 1971, Nigeria recorded a surplus of 171.6, i.e. 2.6% of GDP. Therefore the deficits grew at the rate of -138%. In 1972, however, a deficit of -58.8 resulted and subsequently at a growth rate of -134%. But in 1973, a surplus of 166.1 resulted at a growth rate of -382%. In 1974 also, the fiscal operation resulted in another surplus of 1796.4 at a growth rate of 982%. But in 1975, the deficit of -427.9 re-occurred at a growth rate of -124%. In 1976 also, the budget deficit increased to -1090.8 at a growth rate of 155%. In 1977 however, the deficit was reduced to -781.4 at a growth rate of -28%. But in 1978, budget deficit soared to -2821.9 at a growth rate of 261%. In 1979, a surplus of 1461.7 occurred at a growth rate of -152%. In 1980, a deficit of -1975.2 was recorded at a growth rate of -235%. In 1981, the deficit increased to -3902.1 at a growth rate of 98%. In 1982, the deficit further increased to -6104.1 at a growth rate of 56%. In 1983, the deficit reduced to -3364.5 at a growth rate of -45%. In 1984, it further reduced to -2660.4 at a growth rate of -21%. But in 1985, it increased to -3039.7 at a growth rate of 14%. In 1986, it further increased to -8254.3 at a growth rate of 172%. In 1987, it reduced to -5889.7 at a growth rate of -29%. In 1988, it increased again to -12160.9 at a growth rate of 107%. In 1989, it further rose to -15134.7 at a growth rate of 25%. In 1990, budget deficit steadily increased to -22116.1 at a growth rate of 46%. In 1991, it further increased to -35755.2 at a growth rate of 62%. In 1992, it rose to -39632.5 at a growth rate of 11%. In 1993, it had risen to -107735.5 and a growth rate of 173%. Its percentage to the GDP (9.5%) was the highest in this period, 1993. And in 1994, the deficit was decreased to -70271.6 at a growth rate of -35%. However, in 1995, a surplus of 1000 resulted, therefore the growth rate was -101% and in 1996 too, the surplus was increased to 32049.4 at a growth rate was 3105%. These surpluses occurred because of the guided deregulation policy of the federal government, and afterwards, the deficits continued. In 1997, the deficit was increased to -5000 at a growth rate of -116%. In 1998, it rose sharply to -133389.3 at a growth rate of 2568%. In 1999, the deficit rose continuously to -285104.7 at a growth rate of 114%. In 2000, the deficit was reduced to -103777.3 at a growth rate of -64%. But in 2001, the deficit was increased to -221048.9 at a growth rate of 113%. In 2002, the deficit was further increased to -301401.6 at a growth rate of 36%. But in 2003, the deficit was reduced to -202724.7 at a growth rate of -33%. In 2004, the deficit was further reduced to -172601.3 at a growth rate of -15%. In 2005, the deficit was further decreased to -161406.3 at a growth rate of -7%. And finally, in 2006, the deficit further decreased to -101397 and a growth rate of -37% was realized. See table 2.1 below. BUDGET DEFICIT AND ITS GROWTH RATES
YEARS BD GRBD BD%GDP
1970 -455.1 -8.7457
1971 171.6 -137.71 2.611594
1972 -58.8 -134.27 -0.815726
1973 166.1 -382.48 1.511278
1974 1796.4 981.52 9.817305
1975 -427.9 -123.82 -1.984804
1976 -1090.8 154.92 -3.99597
1977 -781.4 -28.365 -2.386151
1978 -2821.9 261.13 -7.82045
1979 1461.7 -151.8 3.387423
1980 -1975.2 -235.13 -3.884473
1981 -3902.1 97.555 -3.800002
1982 -6104.1 56.431 -5.547679
1983 -3364.5 -44.881 -2.824531
1984 -2660.4 -20.927 -2.127047
1985 -3039.7 14.257 -2.100341
1986 -8254.3 171.55 -5.747163
1987 -5889.7 -28.647 -2.9008
1988 -12160.9 106.48 -4.418961
1989 -15134.7 24.454 -3.748413
1990 -22116.1 46.128 -4.446776
1991 -35755.2 61.67 -6.226069
1992 -39532.5 10.564 -4.345405
1993 -107735.5 172.52 -9.515747
1994 -70270.6 -34.775 -4.822536
1995 1000 -101.42 0.033423
1996 32049.4 3104.9 0.774924
1997 -5000 -115.6 -0.116273
1998 -133389.3 2567.8 -3.252582
1999 -285104.7 113.74 -5.939723
2000 -103777.3 -63.6 -1.514947
2001 -221048.9 113 -3.133076
2002 -301401.6 36.351 -3.774888
2003 -202724.7 -32.739 -1.999975
2004 -172601.3 -14.859 -1.478561
2005 -161406.3 -6.486 -4.430515
2006 -101397.5 -37.179 -2.187106


2.2.2 GROSS DOMESTIC PRODUCT (GDP) {N million}
In 1970, GDP was 5203.7. In 1971, GDP increased to 6570.7; therefore GDP grew at of 26%. In 1972, GDP further increased to 7208.3 at a growth rate of 9.7%. In 1973, GDP increased sharply to 10990.7 at a growth rate of 53%. In 1974, GDP increased steadily to 18298.3 at a growth rate of 67%. In 1975 also, it increased to 21558.8 at a growth rate of 17.8%. In 1976, it increased further to 27297.5 at a growth rate of 27%. In 1977, it equally increased to 32747.3 at a growth rate of 20%. In 1978, it increased slightly to 36083.6 at a growth rate of 10%. In 1979, it moved to 43150.8 at a growth rate of 20%. In 1980, it still increased to 50848.6 at a growth rate of 18%. In 1981, GDP increased to 102686.6 at a growth rate of 102%. In 1982, it moved slightly upwards to 110029.8 recording a growth rate of 7%. In 1983, it increased to 119117.1 at a growth rate of 8%. In 1984, it increased slightly to 125071.8 at a growth rate of 5% and in 1985; GDP was 144724.1 recording a growth rate of 16%. But, in 1986, GDP decreased to 143623.9 thereby recording a negative growth of -0.76%. In 1987, it increased to 203037.1 at a growth rate of 41%. In 1988, it further increased to 275198.2 at a growth rate of 36%. In 1989, it increased steadily to 403762.9 at a growth rate of 47%. Also, in 1990, it moved upwards to 497351.3 at a growth rate of 23%. In 1991, it increased to 574282.1 at a growth rate of 16%. By 1992, it had risen to 909754.2 at a growth rate of 58%. In 1993, GDP rose to 1132181 at a growth rate of 25%. In 1994, it increased to 1457130 at a growth rate of 29%. In 1995, it soared to 2991942 at a growth rate of 105%. In 1996, it further increased to 4135814 at a growth rate of 38%. In 1997, it increased slightly to 4300209 at a growth rate of 4%. But in 1998, GDP decreased to 4101028 and therefore recorded a negative growth of -5%. In 1999, it increased to 4799966 at a growth rate of 17%. In 2000, it further increased to 6850229 at a growth rate of 43%. In 2001, it increased slightly to 7055331 at a growth rate of 3%. In 2002, it increased again to 7984385 at a growth rate of 13%. In 2003, it increased steadily to 10136364 at a growth rate of 27%. In 2004, it moved upwards to 11673602 at a growth rate of 15%. But, in 2005, GDP decreased to 3643060 and therefore recorded a negative growth of -69%. And finally, in 2006, it increased to 4636149 at a growth rate of 27%.
GDP in the pre-SAP period (1970-1985) were very impressive because of the oil boom but declined in the 1980s during the glut in the oil market. However, negative growths of -0.76, -4.63, and -68.79 were recorded in 1986, 1998 and 2005 respectively but GDP recorded its highest rate of 105% in 1995 in the guided deregulation era. From then till now, GDP have been fluctuating up and down. See table 2.2 below


GDP AND ITS GROWTH RATES FROM 1970-2006
YEARS GDP
1970 5203.7
1971 6570.7
1972 7208.3
1973 10990.7
1974 18298.3
1975 21558.8
1976 27297.5
1977 32747.3
1978 36083.6
1979 43150.8
1980 50848.6
1981 102686.8
1982 110029.8
1983 119117.1
1984 125074.8
1985 144724.1
1986 143623.9
1987 203037.1
1988 275198.2
1989 403762.9
1990 497351.3
1991 574282.1
1992 909754.2
1993 1132181
1994 1457130
1995 2991942
1996 4135814
1997 4300209
1998 4101028
1999 4799966
2000 6850229
2001 7055331
2002 7984385
2003 10136364
2004 11673602
2005 3643060
2006 4636149
GRGDP

26.27
9.70
52.47
66.49
17.82
26.62
19.96
10.19
19.59
17.84
101.95
7.15
8.26
5.00
15.71
-0.76
41.37
35.54
46.72
23.18
15.47
58.42
24.45
28.70
105.33
38.23
3.97
-4.63
17.04
42.71
2.99
13.17
26.95
15.17
-68.79
27.26





2.2.3 INTEREST RATES (INT) i.e. MINIMUM REDISCOUNT RATES (%)
In 1970, 1971, 1972, 1973 and 1974 interest rate remained stable at 4.5%, therefore the growth rates were zero. In 1975, interest rate decreased to 4% and therefore recorded a negative growth of -11%. In 1976, interest rate further decreased to 3.5% at a growth rate of -12.5%. But in 1977, it increased to 4%, therefore, the growth rate rose by 14%. In 1978, interest rate further increased to 5%, and the growth rate also rose to 28%. In 1979, interest rate remained stable at 5% and so a zero growth was recorded. In 1980, interest rate rose to 6% recording a 20% growth rate. In 1981, the rate was still 5% thereby recording no growth. In 1982, interest rate rose to 8% recording a 33% growth rate. In 1983, it remained 8% recording zero growth. But in 1984, it increased to 10% at a growth of 25%. In 1985 and 1986, it remained 10% thereby recording zero growth. In 1987, interest rate soared to 13% recording a 28% growth rate and in 1988, the rate remained stable, therefore interest rate grew by zero percent. In 1989, it was 18.5% recording a growth rate of 45% and in 1990 the rate remained unchanged. But in 1991, interest rate decreased to 14.5% recording a negative growth rate of -22%. In 1992, it rose to 17.5% at a growth rate of 21%. In 1993, interest rate soared to 26% recording a 49% growth rate. This is the highest rate ever recorded within this review period. But in 1994, interest rate decreased to 13.5% recording a negative growth of -48%. In 1995, 1996 and 1997, the rate remained the same, therefore no growth was recorded. In 1998, interest rate increased to 14.31% recording a growth rate of 6%. In 1999, it increased to 18% on a growth rate of 26%. But in 2000, the rate decreased to 13.5% recording a negative growth rate of -25%. However, in 2001, interest rate increased to 14.31% recording a growth of 6%. In 2002, interest rate further increased to 19% recording a growth rate of 33%. But in 2003, interest rate decreased to 15.75% recording a negative growth of -17%. In 2004, it further decreased to 15% on a negative growth rate of -5%. In 2005, it decreased further to 13% resulting to a negative growth of -13.3%. Finally, in 2006, interest rate further decreased to 12.25% recording a negative growth of -6%.
From 1970-1986 (before SAP) were periods of highly regulated interest rates regime. As a result of the high regulatory policy of credit operations in the country, interest rates were pegged at the different rates. However, from 1986-1998 were the periods of deregulation. Interest rates were also deregulated and allowed to float and consequently, interest rate soared consistently, though, in a stable manner of at least, a two-year term.
See table 2.3 below




INTEREST RATES AND ITS GROWTH RATES FROM 1970-2006.
YEARS INT GRINT
1970 4.5
1971 4.5 0
1972 4.5 0
1973 4.5 0
1974 4.5 0
1975 4 -11.1
1976 3.5 -12.5
1977 4 14.29
1978 5 25
1979 5 0
1980 6 20
1981 6 0
1982 8 33.33
1983 8 0
1984 10 25
1985 10 0
1986 10 0
1987 12.75 27.5
1988 12.75 0
1989 18.5 45.1
1990 18.5 0
1991 14.5 -21.6
1992 17.5 20.69
1993 26 48.57
1994 13.5 -48.1
1995 13.5 0
1996 13.5 0
1997 13.5 0
1998 14.31 6
1999 18 25.79
2000 13.5 -25
2001 14.31 6
2002 19 32.77
2003 15.75 -17.1
2004 15 -4.76
2005 13 -13.3
2006 12.25 -5.77




2.2.4 EXCHANGE RATES (NOMINAL EXCHANGE RATES, NEC)
In 1970, the nominal exchange rate of the naira with the dollar was 0.7143. In 1971, it appreciated to 0.6955 recording a negative growth of -3%. In 1972, it further appreciated to 0.6579 given a growth rate of -5%. In 1973, it was stabilized at 0.6579 therefore a growth rate of 0% was recorded. In 1974, the exchange rate further appreciated to 0.6299 resulting to a growth rate of -4%. In 1975, it appreciated to 0.6159 resulting to a growth rate of -2%. But in 1976, exchange rate depreciated to 0.6265 recording a growth rate of 2%. In 1977, it further depreciated to 0.6466 resulting to a growth rate of 3%. But in 1978, it appreciated to 0.606 given a growth rate of -6%. In 1979, it further appreciated to 0.5957 given a growth rate of -2%. In 1980, exchange rate further appreciated to 0.5464 resulting to a -8% growth rate. But in 1981, exchange rate depreciated to 0.61 giving a growth rate of 12%. In 1982, it further depreciated to 0.6729 resulting to a growth rate of 10%. In 1983, exchange rate depreciated to 0.7241 giving a growth rate of 8%. In 1984, it depreciated steadily to 0.7649 giving a growth rate of 7%. In 1985, the exchange rate worsened to 0.8938 recording a growth rate of 17%. In 1986, the naira exchanged with the dollar for more than one naira for the first time in Nigeria. It depreciated to 2.0206 resulting to a growth rate of 126%. In 1987, it depreciated again to 4.0179 giving a growth rate of 99%. In 1988, it further depreciated to 4.5367 giving a growth rate of 13%. In 1989, it depreciated to 7.3916 and consequently a growth rate of 63% resulted. In 1990, the exchange rate was 8.0378 at a growth rate of 9%. In 1991, it depreciated consistently to 9.9095 at a growth rate of 23%. In 1992, the exchange rate depreciated to 17.2984 which amounted to a 75% growth rate. In 1993, it further depreciated to 22.0511 giving a growth rate of 28%. However, from 1994-1998, the exchange rate was fixed at 21.8861, therefore in 1994, the growth rate was -0.7% and from 1995-1998, the growth rate remained zero. In 1999, the exchange rate depreciated immensely to 92.7 recording a growth of 324%. In 2000, it further depreciated to 102.1 giving a growth rate of 10%. In 2001, the exchange rate was 111.9 giving a growth rate of 10%. In 2002, it further depreciated to 121 resulting to a growth rate of 8%. In 2003, the exchange rate was 129.4 giving a growth rate of 7%. In 2004, it further depreciated to 133.5 resulting to a growth rate of 3%. In 2005, the exchange rate appreciated to 131.7 giving a growth rate of -1.4%. And finally, in 2006, it further appreciated to 128.7 resulting to a growth rate of -2.3%.
Between the periods, 1970-1985 (pre-SAP period), the nominal exchange rates of the naira with the US dollar were less than one dollar. This was largely connected with the agricultural advantage and then lately, the windfall of income from the sales of oil in the world market. Consequent upon the deregulation of the exchange rate from 1986-1993, the naira was allowed to float independently in the foreign exchange market, and the value of the naira continued to depreciate. Because of the sharp depreciation of the naira, in 1994 the policy was reversed and the naira was pegged again at N21.8861 to US$1 from 1994-1998. On return to the market exchange rate system in 1999, the exchange rates continued to depreciate till date. See table 2.4 below. EXCHANGE RATES AND ITS GROWTH RATES
YEARS NEC GRNEC
1970 0.714
1971 0.696 -2.63195
1972 0.658 -5.40618
1973 0.658 0
1974 0.63 -4.25597
1975 0.616 -2.22258
1976 0.627 1.721059
1977 0.647 3.2083
1978 0.606 -6.279
1979 0.596 -1.69967
1980 0.546 -8.27598
1981 0.61 11.63982
1982 0.673 10.31148
1983 0.724 7.608857
1984 0.765 5.634581
1985 0.894 16.85188
1986 2.021 126.0685
1987 4.018 98.84688
1988 4.537 12.91222
1989 7.392 62.929
1990 8.038 8.742356
1991 9.91 23.28622
1992 17.3 74.5638
1993 22.05 27.4748
1994 21.89 -0.74826
1995 21.89 0
1996 21.89 0
1997 21.89 0
1998 21.89 0
1999 92.69 323.5263
2000 102.1 10.15369
2001 111.9 9.635259
2002 121 8.063814
2003 129.4 6.932534
2004 133.5 3.203473
2005 131.7 -1.37715
2006 128.7 -2.28639


2.2.5 INFLATION RATES (%)
In 1970, inflation rate was 13.8%. In 1971, it increased to 16% giving a growth rate of 16%. In 1972, the inflation rate decreased drastically to 3.2% resulting to a growth rate of -80%. In 1973, it increased to 5.4% giving a growth rate of 69%. In 1974, inflation rose to 13.4% giving a growth rate of 148%. In 1975, inflation soared to 33.9% giving a growth rate of 153%. In 1976, inflation reduced to 21.2% giving a growth rate of -38%. In 1977, it further reduced to 15.4% resulting to a growth rate of -27%. In 1978, inflation rose to 16.6%, giving a growth rate of 8%. In 1979, it reduced to 11.8% giving a growth rate of -29%. In 1980, it further reduced to 9.9% resulting to a growth rate of -16%. But, in 1981, inflation increased to 20.9 giving a growth rate of 111%. In 1982, it decreased to 7.7 giving a growth rate of -63%. But, in 1983, it rose to 23.2% resulting to a growth rate of 201%. In 1984, it further increased to 39.6 giving a growth rate of 71%. In 1985, it reduced sharply to 5.5 giving a growth rate of -86%. In 1986, it further reduced to 5.4 resulting to a growth rate of -2%. In 1987, inflation rose to 10.2 on a growth rate of 89%. In 1988, it further increased to 38.3 on a growth rate of 276%. In 1989, it increased steadily to 40.9 giving a growth rate of 7%. But in 1990, it reduced to 7.5% giving a growth rate of -82%. But in 1991, it increased to 13% on a growth rate of 73%. In 1992, it further increased to 44.5% giving rise to a growth rate of 242%. In 1993, it steadily increased to 57.2 resulting to a growth rate of 29%. In 1994, inflation rate reduced slightly to 57% giving a growth rate of -0.35%. But in 1995, inflation soared to 72.8; this was the highest rate of inflation ever recorded in the country. This amounted to a growth rate of 28%. In 1996, it reduced sharply to 29.3, giving a growth rate of -60%. In 1997, it further decreased to 8.5% giving a growth of -71%. But in 1998, it increased to 10%, at a growth rate of 18%. However, in 1999, it decreased to 6.6% giving a growth of -34%. But in 2000, it increased to 6.9% giving a growth rate of 5%. In 2001, it further increased to 18.9% resulting to a growth rate of 174%. In 2002, it decreased to 12.9% giving a growth rate of -32%. But in 2003, it increased to 14% giving rise to a growth rate of 9%. In 2004, it further increased to 17.9% resulting to a growth rate of 28%. But in 2005, it decreased to 8.2% giving a growth rate of -54%. And finally, in 2006, inflation rate increased to 15.03% resulting to a growth rate of 83%.
Several factors responsible for the rising inflation rates in the 1970s include: Port congestion in the earlier period up to 1974, inadequate response of domestic production to aggregate demand for consumer goods such as food items, clothing, communication facilities, escalation in government expenditures prompted by a large increase in government revenues derived from the boom in the petroleum industry in 1973-1974. Inflation rates soared in the 1980s because of the drought recorded in Northern Nigeria. Also, other factors responsible for the rising inflation rates in the 1980s and 1990s include: global economic crisis, inconsistencies in macroeconomic policies, fiscal deficits, and sharp depreciations of the exchange rates. The 72.8% rate of inflation recorded in 1995 was as a result of the guided deregulation policy of the then military government. This was the highest rate of inflation ever recorded in the history of Nigeria. See table 2.5 below;
IINFLATION AND ITS GROWTH RATES
YEARS INF GRINF
1970 13.8
1971 16 15.942
1972 3.2 -80
1973 5.4 68.75
1974 13.4 148.15
1975 33.9 152.99
1976 21.2 -37.46
1977 15.4 -27.36
1978 16.6 7.7922
1979 11.8 -28.92
1980 9.9 -16.1
1981 20.9 111.11
1982 7.7 -63.16
1983 23.2 201.3
1984 39.6 70.69
1985 5.5 -86.11
1986 5.4 -1.818
1987 10.2 88.889
1988 38.3 275.49
1989 40.9 6.7885
1990 7.5 -81.66
1991 13 73.333
1992 44.5 242.31
1993 57.2 28.539
1994 57 -0.35
1995 72.8 27.719
1996 29.3 -59.75
1997 8.5 -70.99
1998 10 17.647
1999 6.6 -34
2000 6.9 4.5455
2001 18.9 173.91
2002 12.9 -31.75
2003 14 8.5271
2004 17.9 27.857
2005 8.2 -54.19
2006 15.03 83.293
The data utilized in this work is a secondary data. It is a time series data on GDP at current factor prices, interest rates, nominal exchange rates and inflation rates. The data was collected over the period 1970-2006 from the Central Bank of Nigeria’ s Statistical Bulletin, Vol 17, and December 2006.
However, the growth rates of the different data were computed by the researcher.


Table 1 SUMMARY OF SELECTED STUDIES OF BUDGET DEFICITS AND MACROECONNOMIC VARIABLES
STUDY
Budget deficits and macroeconomic variables PERIOD COUNTRY METHODOLOGY MAJOR FINDINGS
Dwyer (1982) 1952-1978 US VAR No evidence found that larger government deficits increase prices, spending, interest rates, or the money stock.
Guess and Koford (1984) 1949-1981 OECD (17) Granger causality test Budget deficits do not cause changes in inflation, GNP, and private investment.
Karras (1994) 1950-1980 Cross-sectional (32) OLS, GLS Deficits do not lead to inflation, deficits are negatively correlated with the rate of growth of real output and increased deficits appear to retard investment.
Al-Khedir (1996) 1964-1993 G-7 VAR Budget deficits led to higher short-term interest rates in the 7 countries. It did not manifest any impact on the long-term interest rates. The trade balance was worsened by the budget deficit and economic growth improved in all 7 countries.
CHAPTER THREE
3.0 RESEARCH METHODOLODY
Since we are interested in finding out whether a long-run relationship exists between budget deficits and macroeconomic variables. We undertake Cointegration and Error Correction Model as the research methodology, and then proceed to causality tests.
3.1 MODEL SPECIFICATION
The researcher has included the following four macroeconomic variables as regressors to estimate the relationship between budget deficits and economic performance of Nigeria. The estimation equation is stated as follows:
BD = F(GDP, INT, NEC, INF).................................... Eqn (i)
Where
BD= Budget deficits defined as federal government retained revenue minus total expenditure
F= Functional notation
GDP: Gross Domestic Product at Current Market Prices
INT= Interest rates i.e. Minimum Rediscount rates
NEC= Nominal Exchange rates
INF: Inflation rates and
3.3 ESTIMATION PROCEDURE:
Having stated above that the researcher uses Cointegration and error correction model as the econometric technique, he also uses the Econometric view (E-view 3.1) software in running this regression because of its wide acceptance in the economic world. The various tests that ought to be carried out in this study include:
(1) Unit Root tests: To test for a unit root in the series, we employ the Augmented Dickey-Fuller tests (ADF test) to test for the stationarity of our data at level and at differences. The model for the test is stated below.
yt = µ + pyt-1 + εt ................................................... (iii)
Where µ and p are parameters and εt is assumed to be white noise, y is a stationary series if -1< p < 1. If p =1, y is a nonstationary series; if the process is started at some point, the variance of y increases steadily with time and goes to infinity. If the absolute value of p is greater than one, the series is explosive. Therefore, the hypothesis of a stationary series can be evaluated by testing whether the absolute value of p is strictly less than one. The simple unit root test described above is valid because the series is an AR(1) process. If the series is correlated at higher order lags, the assumption of white noise disturbances is violated. The DF tests take the unit root as the null hypothesis H0: p =1. Since explosive series do not make much economic sense, this null hypothesis is tested against the one-sided alternative H1 : p <1. The null hypothesis of a unit root is rejected against the one-sided alternative if the t-statistic is less than the critical value.
(2) Cointegration tests: To investigate the existence of a long run relationship between budget deficits and other variables, we explore existence of a long run relationship among the variables in our model. If the variables that we are using in the study are found to be cointegrated, it will provide statistical evidence for the existence of a long run relationship. We employ the maximum-likelihood test procedure established by Johansen (1991) and Juselius (1990).
yt = A1yt-1+…+ Apyt-p + ß xt + εt ................................ (iv)
Where yt is a k-vector of non-stationary I(1) variables, xt is a d vector of deterministic variables, and εt is a vector of innovations. Granger’s representation theorem asserts that if the coefficient matrix П has reduced rank rH*1 (Γ): Пyt-1 + ß xt = α(β1 yt-1+ P0) ......................... (v)
(3) Granger causality test: Correlation does not necessarily imply causation in any meaningful sense of that word. The Granger (1969) approach to the question of whether x causes y is to see how much of the current y can be explained by past values of y and then to see whether adding lagged values of x can improve the explanation. Y is said to be Granger-caused by x if x helps in the prediction of y. It is important to note that the statement “x Granger causes y” does not imply that y is the effect or the result of x. Reviews runs bivariate regressions of the form:
yt = α0 + α1 yt-1 + … + αC yt-c β1xt-1 +…+ βc xt-c ......... (vi)
xt = α0 + α1 xt-1 + … + αC xt-c β1 yt-1 +…+ βc yt-c ....... (vii)
for all possible pairs of (x,y) series in the group. The reported F-statistics are the Wald statistics for the joint hypothesis β1 = … = βc = 0. For each equation, the null hypothesis is therefore that x does not Granger-cause y in the first regression and that y does not Granger-cause x in the second regression.
If budget deficits share a long run relationship with other macroeconomic variables that we are studying, the next step is to examine causality, since if two or more variables are cointegrated; there is causality in at least one direction (Engel and Granger 1987). We then proceed to determine whether deficits Granger-cause GDP and other variables individually and vice versa.
(4) ERROR CORRECTION MODEL: The error correction result shows the speed of the adjustment of the variables to their long-run equilibrium. The Error correction model coefficient is meant to tie the short run disequilibrium of the error term to its long run value. The relationship is estimated using the model below:
ΔBDt = β0 + ∑β1i ΔGDPt-1 + ∑β2i ΔINT t-1 + ∑β3i ΔNEC t-1 + ∑β4i ΔINF t-1 +λECM(-1) + εt ........(viii)
where α1……… α4 are parameters of the independent variables.
λ is the error correction coefficient, µ and ε are the random disturbance term and Δ is the first difference operator. Equation (viii) is a dynamic error-correction model (ECM) of the short-run behaviour of budget deficit, where nk (k=1 to 4) measures the response of budget deficit to changes in the independent variables.

CHAPTER FOUR
4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS
4.1 UNIT ROOT TESTS:
The results of the Augmented Dickey-Fuller (ADF) unit root tests of stationarity are presented below. The time series of our data was examined by conducting the unit root tests using the Augmented Dickey-Fuller (ADF) test. The result is presented below:
Table 4.1 Unit Root Tests Using Augmented Dickey-Fuller (ADF) methods
Series T-ADF at level T-ADF at First differencing 5% critical values Remarks
BD -2.978418 -5.772770 -3.5468 1 (1)
GDP -2.339864 -4.912598 -3.5468 1 (1)
INT -1.940076 -6.879008 -3.5468 1 (1)
NEC -1.788859 -8.472397 -3.5468 1 (1)
INF -3.418689 -5.742075 -3.5468 1 (1)
NB: Lag length=2.
Also, at level or any differencing where the calculated T-ADF is less than the chosen critical values (5%), the data is stationary.
The results in table 4.1 above shows that all the variables have been found to be non-stationary at level but stationary at first differencing at 5% level of significance, i.e. all the variables are integrated of order one. We therefore, proceed to Cointegration tests between the variables to detect any possible long-run equilibrium between the series.
4.3 COINTEGRATION TESTS
In table 4.2 below, the null hypothesis of no cointegrating vector can be rejected for all the variables used in the study (see table 4.2 below) and the empirical findings reinforce the conclusions about the presence of long-run relationship between budget deficits, GDP, interest rates, nominal exchange rates, and inflation rates.
Table 4.2 Johansen’s Cointegration Test
Sample: 1970 2006
Included observations: 35
Test assumption: Linear deterministic trend in the data
Series: BD GDP INT NEC INF
Lag intervals: 1 to 1
Eigenvalue Likelihood Ratio Critical Value 5% Critical Value 1% Hypothesized No. of CE(s)
0.702319 119.3532 68.52 76.07 None **
0.648908 76.94260 47.21 54.46 At most 1 **
0.550520 40.30785 29.68 35.65 At most 2 **
0.246500 12.31961 15.41 20.04 At most 3
0.066638 2.413692 3.76 6.65 At most 4
*(**) denotes rejection of the hypothesis at 5%(1%) significance level
L.R. test indicates 3 cointegrating equation(s) at 5% significance level
4.4 GRANGER CAUSALITY RESULTS
Table 4.4
Pairwise Granger Causality Tests
Date: 10/17/08 Time: 05:23
Sample: 1970 2006
Lags: 2
Observation: 35

NULL HYPOTHESES: F-VALUE F-TAB Probability DECISION
GDP does not Granger Cause BD 5.11872 2.69 0.01223 REJECT
BD does not Granger Cause GDP 5.78913 2.69 0.00748 REJECT
INT does not Granger Cause BD 0.29396 2.69 0.74743 ACCEPT
BD does not Granger Cause INT 0.51092 2.69 0.60507 ACCEPT
NEC does not Granger Cause BD 4.72584 2.69 0.01644 REJECT
BD does not Granger Cause NEC 50.7232 2.69 2.4E-10 REJECT
INF does not Granger Cause BD 0.74975 2.69 0.48113 ACCEPT
BD does not Granger Cause INF 0.11861 2.69 088857 ACCEPT

NOTE: F (V1, V2) = F (4, 30)
V1 = k-1 i.e. the number of parameters minus one
V2 = n-k i.e. the total number of observations minus the number of parameters
At 5% level of significance, with a 4 and 30 degrees of freedom for V1 and V2 respectively, reject the null hypotheses if the calculated F-values are greater than the tabulated F-values otherwise accept the null hypotheses.
In considering the relationship between BD and GDP, it was found that the calculated F-values for BD and GDP are greater than their tabulated F-values; therefore, we reject the null hypothesis and conclude that there is a bi-directional causality between Budget deficits and GDP, i.e. Budget deficit Granger causes GDP and GDP Granger causes budget deficits.
However, the test for causality between interest rates and budget deficits showed that there exists a non bi-directional causality between the two variables. Therefore, interest rates and budget deficits do not cause each other. Moreover, there exists a bi-directional causality between the nominal exchange rates and budget deficits. Therefore, nominal exchange rate Granger causes budget deficits and budget deficits Granger causes nominal exchange but to a larger extent.
With the same level of significance, it was found that inflation does not Granger cause budget deficits and Budget deficits do not Granger cause inflation. Therefore, there is a non bi-directional causality between the two variables.
We then proceed to the error correction model.


4.5 PRESENTATION OF ERRROR CORRECTION MODEL
Dependent Variable: D(BD)
Method: Least Squares
Date: 11/26/08 Time: 21:24
Sample (adjusted): 1971 2006
Included observations: 36 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C 6267.164 6386.614 0.981297 0.3343
D(GDP) 0.001762 0.004333 0.406653 0.6871
D(INT) -5239.714 2010.750 -2.605851 0.0141
D(NEC) -2899.306 583.8486 -4.965852 0.0000
D(INF) -10.61644 391.0505 -0.027149 0.9785
ECM(-1) -0.921117 0.189006 -4.873481 0.0000
R-squared 0.667202 Mean dependent var -2803.956
Adjusted R-squared 0.611735 S.D. dependent var 58685.42
S.E. of regression 36567.41 Akaike info criterion 24.00271
Sum squared resid 4.01E+10 Schwarz criterion 24.26663
Log likelihood -426.0489 F-statistic 12.02893
Durbin-Watson stat 1.541636 Prob(F-statistic) 0.000002
R2= 0.6672, F Calculated= 12.0289, F Tabulated= 2.69, DW= 1.5416, t0.025 =+1.96 and -1.96.
From the result above, budget deficit quickly adjusts to its long run value in a time speed of 92%. The t-statistic of the ECM coefficient confirms that it is statistically significant. With respect to the Granger Representative Theorem (GRT), negative and statistically significant error correction coefficient are necessary conditions for the relevant variables to be cointegrated.
4.6 EVALUATION OF THE APRIORI TEST:
The result above implies that there is a positive relationship between budget deficits and GDP but a negative influence on interest rate. This is in agreement with the Keynesian view. The implication is that a unit increase in GDP increases the budget deficit by 0.00 1762 units; also a unit increase in budget deficits increases GDP by 0.001762 units, since they share a bi-directional causality. However, it shows a negative relationship between budget deficits, interest rate, inflation and nominal exchange rates. The result implies that a unit increase in interest rate, inflation and nominal exchange rates will decrease the deficits by 5239.7, 2899.3, and 10.6 units respectively. The result, however, opposed the monetarist approach of deficit versus inflation and is in consonance with Dwyer, 1982.
4.7 EVALUATION OF THE STATISTICAL TEST:
The Coefficient of Determination (R2): The R2 of 0.67 shows that the independent variables included in the model explains 67% of the variations in the dependent variable. Therefore the model is a good fit to the relationship.
T-Tests: In the case of deficits, inflation and GDP, we conclude that the relationship is insignificant while budget deficits exert significant influence on interest rate and nominal exchange rate.
4.8 EVALUATION OF THE ECONOMETRIC TESTS:
AUTOCORRELATION TEST
The computed DW is 1.5416, while at 5% level of significance, the dl and du are 1.18 and 1.80 respectively. Since DW lies between dl and du, therefore there is inconclusive evidence of first order serial correlation, either positive or negative.
4.9 EVALUATION OF WORKING HYPOTHESIS
The researcher wishes to use the F-Statistics to test the working hypothesis. This is aimed at finding out if budget deficit exerts significant impact on the whole regression plane. Since F-calculated (12.0289) is greater than F-tabulated (2.69), we reject Ho and conclude that budget deficits exert significant impact on macroeconomic performance of Nigeria.








CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, POLICY RECOMMENDATION AND CONCLUSION
It is an established theory by the Keynesian schools that deficits crowd-in investment through its influence on domestic production. By making reference to the expansionary effects of budget deficits, they argue that usually budget deficits result in an increase in domestic production, which makes private investors more optimistic about the future course of the economy resulting in them investing more and therefore crowding-in investment.
This work examines the long-run relationship between budget deficit and other macroeconomic variables in Nigeria. The results confirm to the above theory but rejects the claim that budget deficits increase interest rate, which is a popular opinion held by both the Keynesian and the Neoclassical schools. In the empirical exercise, we have used the Augmented Dickey-Fuller (ADF) methods for finding out the presence of unit root in all the variables (budget deficit, GDP, interest rate, inflation and nominal exchange rate) used in the study and have found that they are non-stationary at level but stationary at first differencing {i.e. they are 1 (1)}. We have employed Johansen’s Cointegration Test to check cointegration of these variables. We found that the variables in the study are all cointegrated of order one, i.e. there is the presence of long-run relationship between budget deficits, GDP, interest rates, nominal exchange rates, and inflation rates. The Granger Causality results in the presence of cointegrating relationships reveal that there is a bi-directional Granger-causality between Budget deficits and GDP and budget deficit and nominal exchange rate. However, the test for causality showed that there exists no causality between deficits and interest rate and budget deficits and inflation. The error correction model (ECM) coefficient (-0.92) is negative and statistically significant.
From my empirical analysis, budget deficits could crowd-in investment through its reducing effects in interest rate, and thereby contribute to economic growth as long as the percentage to GDP is not greater than 3.7%. Policy makers should control the level of deficits to ensure that it is within this level. Also, a decrease in the level of the deficits could strengthen the exchange rate as it has a negative relationship with it
In conclusion, our studies denote that there is a long-run relationship between budget deficits and macroeconomic variables and budget deficits exert significant impact on macroeconomic performance of Nigeria.




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Vuyyuri, S. and Seshaiah, 2004, Applied Econometrics and International
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Yellen, Janet L. (1989), “Symposium on the Budget Deficit”, Journal of Economic
Perspectives, Vol. 3, No. 2.

APPENDIX II
RESULT OF STATIC RELATIONSHIP
OLS
Dependent Variable: BD
Method: Least Squares
Date: 11/26/08 Time: 20:32
Sample: 1970 2006
Included observations: 37
Variable Coefficient Std. Error t-Statistic Prob.
C 22448.30 16686.49 1.345298 0.1880
GDP -0.000574 0.005073 -0.113094 0.9107
INT -4367.580 1665.108 -2.623001 0.0132
NEC -1243.044 338.3250 -3.674111 0.0009
INF 587.2856 488.9656 1.201077 0.2385
R-squared 0.778384 Mean dependent var -53911.83
Adjusted R-squared 0.750682 S.D. dependent var 86721.53
S.E. of regression 43301.58 Akaike info criterion 24.31485
Sum squared resid 6.00E+10 Schwarz criterion 24.53255
Log likelihood -444.8248 F-statistic 28.09848
Durbin-Watson stat 1.455741 Prob(F-statistic) 0.000000




RESULT OF THE DYNAMIC RELATIONSHIP
ECM RESULT
Dependent Variable: D(BD)
Method: Least Squares
Date: 11/26/08 Time: 21:24
Sample (adjusted): 1971 2006
Included observations: 36 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C 6267.164 6386.614 0.981297 0.3343
D(GDP) 0.001762 0.004333 0.406653 0.6871
D(INT) -5239.714 2010.750 -2.605851 0.0141
D(NEC) -2899.306 583.8486 -4.965852 0.0000
D(INF) -10.61644 391.0505 -0.027149 0.9785
ECM(-1) -0.921117 0.189006 -4.873481 0.0000
R-squared 0.667202 Mean dependent var -2803.956
Adjusted R-squared 0.611735 S.D. dependent var 58685.42
S.E. of regression 36567.41 Akaike info criterion 24.00271
Sum squared resid 4.01E+10 Schwarz criterion 24.26663
Log likelihood -426.0489 F-statistic 12.02893
Durbin-Watson stat 1.541636 Prob(F-statistic) 0.000002




UNIT ROOT TESTS
GDP
ADF Test Statistic -4.912598 1% Critical Value* -4.2505
5% Critical Value -3.5468
10% Critical Value -3.2056
*MacKinnon critical values for rejection of hypothesis of a unit root.


INT
ADF Test Statistic -6.879008 1% Critical Value* -4.2505
5% Critical Value -3.5468
10% Critical Value -3.2056
*MacKinnon critical values for rejection of hypothesis of a unit root.

NEC
ADF Test Statistic -3.758548 1% Critical Value* -4.2505
5% Critical Value -3.5468
10% Critical Value -3.2056
*MacKinnon critical values for rejection of hypothesis of a unit root.

INF
ADF Test Statistic -5.742075 1% Critical Value* -4.2505
5% Critical Value -3.5468
10% Critical Value -3.2056
*MacKinnon critical values for rejection of hypothesis of a unit root.

BD
ADF Test Statistic -5.772770 1% Critical Value* -4.2505
5% Critical Value -3.5468
10% Critical Value -3.2056
*MacKinnon critical values for rejection of hypothesis of a unit root.

JOHANSEN’S CO-INTEGRATION TEST
Sample: 1970 2006
Included observations: 35
Test assumption: Linear deterministic trend in the data
Series: BD GDP INT NEC INF
Lag intervals: 1 to 1
Eigenvalue Likelihood Ratio Critical Value 5% Critical Value 1% Hypothesized No. of CE(s)
0.702319 119.3532 68.52 76.07 None **
0.648908 76.94260 47.21 54.46 At most 1 **
0.550520 40.30785 29.68 35.65 At most 2 **
0.246500 12.31961 15.41 20.04 At most 3
0.066638 2.413692 3.76 6.65 At most 4
*(**) denotes rejection of the hypothesis at 5%(1%) significance level
L.R. test indicates 3 co-integrating equation(s) at 5% significance level




YEARS GDP INT NEC INF BD
1970 5203.7 4.5 0.7143 13.8 -455.1
1971 6570.7 4.5 0.6955 16 171.6
1972 7208.3 4.5 0.6579 3.2 -58.8
1973 10990.7 4.5 0.6579 5.4 166.1
1974 18298.3 4.5 0.6299 13.4 1796.4
1975 21558.8 4 0.6159 33.9 -427.9
1976 27297.5 3.5 0.6265 21.2 -1090.8
1977 32747.3 4 0.6466 15.4 -781.4
1978 36083.6 5 0.606 16.6 -2821.9
1979 43150.8 5 0.5957 11.8 1461.7
1980 50848.6 6 0.5464 9.9 -1975.2
1981 102686.8 6 0.61 20.9 -3902.1
1982 110029.8 8 0.6729 7.7 -6104.1
1983 119117.1 8 0.7241 23.2 -3364.5
1984 125074.8 10 0.7649 39.6 -2660.4
1985 144724.1 10 0.8938 5.5 -3039.7
1986 143623.9 10 2.0206 5.4 -8254.3
1987 203037.1 12.75 4.0179 10.2 -5889.7
1988 275198.2 12.75 4.5367 38.3 -12160.9
1989 403762.9 18.5 7.3916 40.9 -15134.7
1990 497351.3 18.5 8.0378 7.5 -22116.1
1991 574282.1 14.5 9.9095 13 -35755.2
1992 909754.2 17.5 17.2984 44.5 -39532.5
1993 1132181 26 22.0511 57.2 -107735.5
1994 1457130 13.5 21.8861 57 -70270.6
1995 2991942 13.5 21.8861 72.8 1000
1996 4135814 13.5 21.8861 29.3 32049.4
1997 4300209 13.5 21.8861 8.5 -5000
1998 4101028 14.31 21.8861 10 -133389.3
1999 4799966 18 92.6934 6.6 -285104.7
2000 6850229 13.5 102.1052 6.9 -103777.3
2001 7055331 14.31 111.9433 18.9 -221048.9
2002 7984385 19 120.9702 12.9 -301401.6
2003 10136364 15.75 129.3565 14 -202724.7
2004 11673602 15 133.5004 17.9 -172601.3
2005 3643060 13 131.6619 8.2 -161406.3
2006 4636149 12.25 128.6516 15.03 -101397.5

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