Fiscal Financing and Money Supply in Nigeria: An Empirical Analysis

Abstract

The study investigated the impact of fiscal financing on money supply in Nigeria. ARDL is employed for empirical analysis. The descriptive statistics indicated that all variables were normally distributed except foreign borrowing. The correlation matrix showed that all variables have an average positive relationship except for the relationship between money supply and domestic borrowing which indicated a very high association. From the ARDL analysis, the finding revealed that, in the short run, foreign borrowing had a negative and significant impact on money supply at instant and one-lag periods. Also, in the short run, at the impulse period, domestic borrowing had a negative and significant impact. However, in the one-lag period, domestic borrowing indicated a positive and strongly significant impact on the money supply. The adjustment path of the money supply using the model was quite insignificantly weak. In the long run, both foreign and domestic borrowing had a positive and significant impact on the money supply in the Nigerian economy. Finally, the result revealed that domestic borrowing had more and symbolic impact on money supply than foreign borrowing. The study, therefore, suggests that the government could make use of borrowing from the foreign source than domestic, as more foreign borrowing will reduce the money supply in the short run. In line with this, the government could choose either of the two sources of financing, as that will depend on the monetary policy target.