Fiscal Policy and Financial Depth in Nigeria: An Application of Threshold Regression Modeling

Authors

  • Abubakar Jamilu Baita Faculty of Economics and Business, Universitas Islam Internasional Indonesia, Depok, 16416 Jawa Barat, Indonesia
  • Salisu Garba Abdullahi Faculty of Economics and Business, Universitas Islam Internasional Indonesia, Depok, 16416 Jawa Barat, Indonesia
  • Mansur Muhammad Faculty of Social Sciences, Usman Danfodiyo University Sokoto, 840104 Sokoto, Nigeria

DOI:

https://doi.org/10.56225/ijfeb.v2i4.215

Keywords:

Fiscal Policy, Government Expenditure, Financial Depth, Threshold Regression, Nigeria context

Abstract

The study examines Nigeria's non-linear relationship between fiscal policy and financial depth. In essence, the study is concerned with the impacts of fiscal deficit, domestic debt, and government expenditure on financial depth. The study uses four indicators of financial deepening: liquid liabilities, credit to the private sector, deposit money banks’ assets and financial system deposits (all indicators are expressed as percent of GDP). In particular, the government is the threshold variable expected to have a threshold effect on Nigeria's financial depth. The study covers 60 years between 1961 and 2020 and employs a threshold regression model to achieve the research objectives. A linear regression model is employed for the robustness test by including the government expenditure square to test the significance of non-linearity. The study's findings establish fiscal policy's significance in driving financial depth. Beyond the threshold of 8.11 percent, government expenditure significantly increases financial deepening. This is consistent across the indicators of financial depth and the overall financial depth. It further shows the important role of fiscal deficit and domestic debt in deepening the financial market as the threshold value exceeds 8.11 percent. However, fiscal may have a negative, though insignificant, effect on financial depth when the threshold of government expenditure is no more than 8.11%. Real per capita is also a key factor in promoting financial depth. Therefore, higher income is important for a financially deeper financial system. Therefore, attaining minimum government expenditure is crucial for accelerating financial development in Nigeria.

References

Achyarsyah, P., Nur, M., Indriyanto, E., Digdowiseiso, K., & Haat, M. H. C. (2023). Uncovering the Lack of Public Accountability: An Application of Accounting Standards for Entities in Indonesia. International Journal of Business, Economics & Financial Studies, 1(2), 40–44. https://doi.org/10.62157/ijbefs.v1i2.20

Akitoby, B., & Stratmann, T. (2008). Fiscal Policy and Financial Markets*. The Economic Journal, 118(533), 1971–1985. https://doi.org/10.1111/j.1468-0297.2008.02198.x

Alenoghena, R. O. (2015). Financial market development and fiscal deficit financing in Nigeria. Biennial Conference of the Economic Society of South Africa, University of Cape Town, South Africa.

Banerjee, S., Anand, J. K., & Bhide, S. (2021). Estimation of Macro-financial Linkages for the Indian Economy. Journal of Emerging Market Finance, 20(1), 7–47. https://doi.org/10.1177/0972652720927856

Bardhan, S., Sharma, R., & Mukherjee, V. (2019). Threshold Effect of Bank-specific Determinants of Non-performing Assets: An Application in Indian Banking. Journal of Emerging Market Finance, 18(1), 1–34. https://doi.org/10.1177/0972652719831546

Caballero, R., & Krishnamurthy, A. (2004). Fiscal Policy and Financial Depth. NBER Working Paper, 10532(5), 1–22. https://doi.org/10.3386/w10532

Ersoy, İ. (2012). Government debt vs. financial depth dilemma in developing countries: The case of Turkey. Acta Oeconomica, 62(3), 345–362. https://doi.org/10.1556/aoecon.62.2012.3.3

Evans, O. (2020). Fiscal discipline, financial development & economic growth in Nigeria. In Dynamics of Fiscal and Monetary Policies in ECOWAS Countries (pp. 1–27). University of Lagos Press.

Gnimassoun, B., & Do Santos, I. (2021). Robust structural determinants of public deficits in developing countries. Applied Economics, 53(9), 1052–1076. https://doi.org/10.1080/00036846.2020.1824063

Gunu Suleiman, U., & Gunu, U. (2020). Effect of income diversification on the financial performance of quoted manufacturing firms in Nigeria. Journal of Research in Emerging Markets, 3(1), 44–57. https://doi.org/10.30585/jrems.v3i1.569

Hauner, D. (2006). Fiscal Policy and Financial Development. IMF Working Papers, 06(26), 1–26. https://doi.org/10.5089/9781451862867.001

Hauner, D. (2009). Public debt and financial development. Journal of Development Economics, 88(1), 171–183. https://doi.org/10.1016/j.jdeveco.2008.02.004

Hutauruk, R. P. S., Zalukhu, R. S., & Collyn, D. (2023). The Effect of Capital Structure, Financial Performance, Firm Growth and Size on Firm Value: Empirical Study on Manufacturing Listed Companies on the Indonesia Stock Exchange. International Journal of Business, Economics & Financial Studies, 1(2), 52–57. https://doi.org/10.62157/ijbefs.v1i2.22

Ismihan, M., & Ozkan, F. G. (2012). Public debt and financial development: A theoretical exploration. Economics Letters, 115(3), 348–351. https://doi.org/10.1016/j.econlet.2011.12.040

Iyidogan, P. V., & Turan, T. (2017). Government Size and Economic Growth in Turkey: A Threshold Regression Analysis. Prague Economic Papers, 26(2), 142–154. https://doi.org/10.18267/j.pep.600

Karina, A., Nur, M., Molina, M., Digdowiseiso, K., & Ali, A. (2023). A Review of Internal Control and Accountability of Regional Financial Management Literature. Global Journal of Business, Economics & Social Development, 1(2), 101–107. https://doi.org/10.56225/gjbesd.v1i2.13

Kutivadze, N. (2011). Public debt and financial development.

Mun, M. W., & Ismail, N. W. (2015). The impact of domestic public debt on financial development in Malaysia. International Journal of Social Science Research, 3(2), 1–19.

Nur, M., Molina, M., Indriyanto, E., Digdowiseiso, K., & Hashim, H. A. (2023). Determinants of the Selection of Accounting Conservatism in Indonesia: A Systematic Literature Review Approach. Global Journal of Business, Economics & Social Development, 1(2), 64–77. https://doi.org/10.56225/gjbesd.v1i2.9

Nwaogwugwu, I. C. (2018). Fiscal Policy and Financial Development in Nigeria 1981-2016. BVIMSR Journal of Management Research, 10(1), 1–10.

Oshikoya, T. W., & Durosinmi-Etti, K. (2019). Frontier Capital Markets and Investment Banking (Vol. 13). Routledge. https://doi.org/10.4324/9780429200519

Prayogo, I., Ubaidillah, M., Sholih, M. W., & A’yun, A. Q. (2023). An Investigation of Management of Kanzus Sholawat on the Ethics of Preparing Financial Statements in Indonesia. Global Journal of Business, Economics & Social Development, 1(1), 1–6. https://doi.org/10.56225/gjbesd.v1i1.1

Sinta, I., Ilham, R. N., Nurhasanah, N., Rais, R. G. P., & Rahmaniar, R. (2023). The Effects of Company Profit and Loss and Type of Industry on the Profitability of PT. Perkebunan Nusantara IV North Sumatra, Indonesia. International Journal of Business, Economics & Financial Studies, 1(1), 19–23. https://doi.org/10.62157/ijbefs.v1i1.10

Soludo, C. (2007). Nigeria’s financial system strategy 2020 plan: Our dream. FSS 2020 International Conference, 1–45.

Umaru, A. D., Aliero, H. M., & Abubakar, M. (2023). Budget Deficit and Economic Growth in Nigeria: A Further Assessment. Futurity Economics & Law, 59(2), 157–172. https://doi.org/10.57125/FEL.2023.09.25.09

Zalukhu, R. S., Sinurat, M., Collyn, D., Hutauruk, R. P. S., & Syahputra, A. (2023). Factors that Influence the Effectiveness of Accounting Information Systems: A Case Study of Government Agency in North Nias Regency, Indonesia. International Journal of Business, Economics & Financial Studies, 1(2), 58–63. https://doi.org/10.62157/ijbefs.v1i2.23

Downloads

Published

2023-12-31

How to Cite

Baita, A. J., Abdullahi, S. G., & Muhammad, M. (2023). Fiscal Policy and Financial Depth in Nigeria: An Application of Threshold Regression Modeling. International Journal of Finance, Economics and Business, 2(4), 269–279. https://doi.org/10.56225/ijfeb.v2i4.215
Abstract viewed = 71 times