Abstract

AN EXAMINATION OF THE RELATIONSHIP BETWEEN FISCAL DEFICIT FINANCING AND INTEREST RATE IN NIGERIA (1970 – 2011)

Nura Sani Yahaya, Hassan Abdullahi

Volume: 5 Issue: 3 2015

Abstract:

The study examines the relationship between fiscal deficit financing and interest rate in Nigeria from 1970 to 2011. It employed vector error correction techniques on the variables, fiscal deficit financing (FDEF), Interest rate, (INT), Money Supply (MS) and Exchange rate (EXCR). The techniques were adopted in order to examine the long run relationship and their direction of causality existing between the variables under study. Based on model approach, preliminary investigation on the time series reveals stationary using Augmented Dikey Fuller at first difference. Co-integration results show a stable long- run equilibrium condition between the variables under study, Granger causality test was also conducted in order to examine the direction of causality between the variables. The VECM estimates revealed that there is a strong relationship between the variables and the lag values. Based on these findings, the study recommends that policy makers should control interest rates for the development of infrastructures and improvement in the level of investment as well as favorable exchange rate for the economy by promoting exports.

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