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AN ANALYSIS OF BUDGET DEFICIT AND INFLATION ON ECONOMIC DEVELOPMENT IN NIGERIA
Abstract: Budget deficit and inflation are important macroeconomic variables that influence the development of an economy which has its resulting effect through increase in government expenditure. This study examined the effect of budget deficit and inflation on economic development in Nigeria from 1981 to 2018. The study made use of secondary data sourced from the Central Bank of Nigeria Statistical Bulletin (2018). A test for unit root and co-integration using the Augmented-Dickey Fuller (ADF) and Bound Test were conducted among the variables namely budget deficit, inflation, money supply, total government debt and per capita income. The Pairwise Granger Causality test was carried out to determine the direction of causality among the variables. Autoregressive Distributed Lag technique was employed to examine the relationships among the variables used. The result of the ARDL coefficient indicated that budget deficit as a percentage of gross domestic products and inflation rate had negative and significant effect on per capital income both in the short and long run. However, the Bound Co-integration test revealed that there is long run equilibrium relationship among the variables. The Pairwise Granger Causality test result showed that budget deficit did not granger cause economic development while inflation granger cause economic development. The conclusion from the findings of the study showed that as budget deficit widens, economic development (proxy as per capita income) reduces and the different sources of financing the deficit are inflationary induced. The study recommended that, government should watch the growth rate of money supply as source of financing deficit due to the negative effect of inflation on economic development; efficient strategies should be device to ensure effective management of resources through elimination of inefficiency and curbing of corruption in government institutions. Keywords: Budget Deficit, Inflation, Per Capita Income, ARDL Model