Effect of Deficit Financing On Unemployment Rate in Nigeria: An Error Correction Model

Abstract

Deficit Financing plays an extraordinary and growing role in achieving full employment in Nigeria sustainable economic growth, price stability and poverty reduction. Theoretically, both Keynesian and neoclassical economists provided tools for government’s intervention, particularly with regard to government budget deficit financing. This study is aimed at examining the effect of deficit financing on unemployment rate in Nigeria. The study adopted the ex-post facto research design. Annual time series data for 44years were collected from Central Bank of Nigeria Statistical Bulletin, Federal Office of Statistics and World Bank Handbook of Statistics for the period of 1970-2013. The study indicate that the validity of long run equilibrium relationship between unemployment (UNP) and the explanatory variables (external source of deficit financing (EXF), ways and means source of deficit financing (WM), banking system source of deficit financing (BSF), non-banking public source of deficit financing (NBPF), interest rate (INTR) and exchange rate (EXR)). More so, it is concluded that the Error Correction Model (ECM) is not a spurious model as the computed R2value of 0.913214 is lower than 1.334885 (Durbin Watson Statistics). However, the R2 shows that 91.32% of the total variations in unemployment rate (UNP) is accounted for, by the explanatory variables (external financing (EXF), ways and means (WM), banking system financing (BSF), non-banking public financing (NBPF), interest rate (INTR) and exchange rate (EXR)). The result also indicates that external source of deficit financing (EXF), ways and means source of deficit financing (WM) and interest rate (INTR) has negative and insignificant implications on economic stability through unemployment level in Nigeria while banking system source of deficit financing (BSF), non-banking public source of deficit financing (NBPF), and exchange rate (EXR) has positive and significant implication on economic stability in Nigeria except non-banking system financing which indicates insignificant. The implications of this result is that deficit financing through external source of deficit financing (EXF) and ways and means source of deficit financing (WM) reduces the level of unemployed individuals in Nigeria which maintain economic stability in the short and long run. The result also revealed that deficit financing through banking sector source of deficit financing and non-banking public source of deficit financing increases unemployment and thereby causing instability in the economy. Unemployment rate (UNP) stands high in 1980 and dropped in 1981. The number of unemployed has been fluctuating from 1970 to 1987, the unemployment rate has continuously witnessed an increase with the highest level of unemployment registered from 1988 to 2013. In conclusion, deficit financing is positively related to unemployment rate indicating that sound policies are needed to achieve economic stability in Nigeria through reduction of the level of unemployment rate in Nigeria.

Keywords: Deficit Financing, ECM, External Financing, Unemployment Rate, Ways and Means


Article Review Status: Published

Pages: 28-46 (Download PDF)

Creative Commons Licence
This work by European American Journals is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License