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IMPACT OF BUDGET DEFICIT ON GROWTH: AN EMPIRICAL CASE STUDY ON NIGERIA
Abstract
The large and persistent budget deficits can generate considerable concern regarding the growth of the economy and can bring crisis to the economy. This research aims at investigating the true impact of the budget deficit on GDP growth. As employment rate, exchange rate, interest rate, and inflation also cause impact on the GDP, these variables had also been considered as control variables along with the budget deficit. The quarterly data of the variables had been considered from the period of 2000-2012. Different statistical tests and models (i.e. Unit root test, VAR, Granger Causality) had been used to find out the impact of budget deficit on GDP growth. For short run adjustment and cointegrating relation measurement, Vector Error Correction (VEC) method was also used . Both VAR and VEC models had been tested based on their stability tests. The results of the research suggest that, there are co-integrating relationships among budget deficit, inflation and exchange rate and there is a negative impact of budget deficit on GDP growth.
Key words: Budget deficit, Unemployment, Interest rate, Inflation, Economic growth (GDP), Exchange rate, VAR, VECM