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Fiscal Reaction Functions and Public Debt Sustainability in Nigeria: An Error Correction Mechanism Approach

Opeoluwa A. Adeosun

,

Sikiru A. Adedokun

Opeoluwa A. Adeosun 1

Sikiru A. Adedokun 2

  1. Doctoral Student, Department of Economics, Obafemi Awolowo University, Nigeria. 1

  2. Lecturer, Department of Economics, Obafemi Awolowo University, Nigeria. 2

Pages: 116-132

DOI: 10.18488/journal.74.2019.62.116.132

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Article History:

Received: 06 August, 2019
Revised: 10 September, 2019
Accepted: 14 October, 2019
Published: 02 December, 2019


Abstract:

The pervasiveness and persistent spiral of public debt in the country provide needed insights to determine the tendency for achieving sustainable debt. This, essentially, spurs the study to examine the responsiveness of Nigeria’s fiscal authorities to rising debt accumulation. As such, the study employs conventional unit root and cointegration approaches to estimate the fiscal reaction functions used in the study. Findings suggest that the existence of equilibrium relationship, in the models estimated, signals the fulfillment of the necessary condition for achieving debt sustainability. However, the sufficient condition for a sustainable public debt could not be met; this is evident in the negative response of government primary balances to changes in public debt in the long run. These findings readily affirm that government’s fiscal behaviour is not in tandem with the tenet of the intertemporal budget constraint as fiscal authorities could not generate enough surpluses in reaction to public debt increases. Therefore, there is threat to the feasibility of ensuring a sustainable public debt, importantly, as fiscal pressures and excesses still remain endemic issues. The study concludes that the fiscal operations of Nigerian government cannot sufficiently allow for a sustainable debt; hence, consistent running of this fiscal stance could either spur harsh adjustment measures in the long run or result to insolvency and default.
Contribution/ Originality
This study is one of the sparse studies that elucidate the tendency for achieving public debt sustainability in Nigeria through the lens of fiscal reaction functions which are hinged on the government budget constraints.

Keywords:

Public debt, Debt sustainability, Fiscal reaction function, Intertemporal budget constraint, Nigeria.

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Reference:

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Statistics:

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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

The succinct and valuable suggestions of the anonymous reviewers are commendable. Therefore, the authors express gratitude for their contributions in enhancing the robustness of the study. They are certainly not responsible for any remaining error in the work.

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