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The Effect of Fiscal Deficit on Investment in Nigeria

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Abstract

Investment has been identified as a major factor in the economic growth and development, and by extension, contributes to high rate of employment, productivity, capital formation, improved technology and poverty reduction. However, the effect of fiscal deficit on investment has been a controversial issue in Nigeria. For this reason, this study generally investigates the effect of fiscal deficit on investment in Nigeria, and specifically, to determine the effect of fiscal deficit on private domestic investment, the effect of fiscal deficit on foreign direct investment and to determine the relationship between private domestic investment and public investment in Nigeria between the periods 1980-2015. The study adopts neoclassical theory of investment of Dale Jorgenson’s approach, using macroeconomic data from 1980-2015. It employs Dickey Fuller Generalized Least Square (DFGLS) and Ng-Perron unit root tests, and ARDL Bounds testing approach to cointegration for the estimation techniques. The econometric evidence indicates that fiscal deficit has a negative effect on private domestic investment in the short. However, fiscal deficit has positive effect on foreign direct investment in the long run. Public investment and private domestic investment are autonomous in Nigeria. Following the findings, the study recommends that federal government should finance budget deficit through money creation.

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  • Nurudeen Olanipekun, Kasali, 2020. "The Effect of Fiscal Deficit on Investment in Nigeria," Working Papers 3, Department of Economics, University of Ilorin.
    • Handle: RePEc:ris:decilo:0003
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    1. World Bank, 2012. "World Development Indicators 2012," World Bank Publications - Books, The World Bank Group, number 6014, December.
    2. Easterly, William & Schmidt-Hebbel, Klaus, 1993. "Fiscal Deficits and Macroeconomic Performance in Developing Countries," The World Bank Research Observer, World Bank, vol. 8(2), pages 211-237, July.
    3. Jonathan Huntley, 2014. "The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment: Working Paper 2014-02," Working Papers 45140, Congressional Budget Office.
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    More about this item

    Keywords

    fiscal deficit; private domestic investment; foreign direct investment; public investment.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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