Dynamics of Budget Deficit and Macroeconomic Fundamentals: Further Evidence from Nigeria

Abstract

Using quarterly time-series data from 1970-2012, this paper examines the responses of budget deficits to selected macroeconomic fundamentals in Nigeria. Although budget deficit responds with a positive movement for every one standard deviation positive shock to real gross domestic product at the early stage, subsequent positive shocks or variations in real gross domestic product elicit a negative response from budget balance right from the 10th period down to the 172nd period. Budget deficit shows signs of decline at the initial stage in response to a positive innovation in real interest rate. However, this response normalized to a positive one as from the 11th period and remains so all through the periods under review. As more money is released into the economy, budget deficit responds to this positive shock in money supply with a continuous decline all through the periods under review. Implicit, but central to these responses by budget deficit is that private sector investment remains the key to an economic growth that will not mortgage a country's future for today's survival.