Impact of Budget Deficit Financing on Money Supply in Nigeria

Abstract

This study empirically investigated the impact of budget deficit financing on money supply in Nigeria. The study is modeled using a framework of Keynesian theory of budget deficit financing and Richadian Equivalent hypothesis. Due to the homogeneity of macroeconomic variables, it adopted a vector error correction mechanism (VECM) which shows the existence of long run relationship between money supply and indicators of financing budget deficit. The general findings revealed that external source of financing budget deficit; internal source of financing budget deficit as well as debt servicing has a significant effect on money supply for the period under review in the Nigerian context. Base on these findings, the study recommended that external and internal source of financing budget deficit should be encouraged for effective and increased economic stability in Nigeria and not for political reasons. It should be properly channeled to productive sector of the economy that enhances economic stability.