ANALYTICAL FRAMEWORK
The basic aim of any economic
research is to combine economic theory and statistical techniques for inference
to arrive at a given theoretical proposition. The economic theory states the
nature of the hypothesis and through inference and different methods of
estimation, the research tests to validate these hypotheses.
Economic theory proposes in favour,
neutrality and against budget deficit in an economy. These propositions were
made by different economists. Some empirical works also favoured the above
three distinct propositions while relating them with other macroeconomic
variables. In order to study the Nigerian economy in the face of budget
deficit, this study will employ econometric method as the research technique.
This choice resulted from the need to study budget deficits, its relationship
with
macroeconomic variables and the pace of economic growth in Nigeria.
MODEL SPECIFICATION
An economic model is a
representation of the basic feature of an economic phenomenon. It is also an
abstraction of the real world. Model specification is based on the relevant
information available for our study. Also, it depends on the theoretical and
empirical works already studied.
Two models will be used in this
research work. The first is a linear model to capture the nature of the relationship
between budget deficit and economic growth in Nigeria. The model will also be
used to determine the macroeconomic variable that greatly influences budget
deficit and Nigerian economic growth. The second model shows (represents) the
model to be used for causality analysis between budget deficit and economic
growth in Nigeria.
The functional form of this models
can be specified as follows:
BD = f(RGDP,
CAD,RER,FGCE,RIR) ……………………… 3.1
Where:
BD = Budget deficit
RGDP = Real Gross Domestic Product
CAD = Current Account Deficit
REXR = Real Exchange Rate
RIR = Real Interest Rate
Ut = Stochastic Error Term
The BD is
the dependent variable while RGDP, CAD, REXR, RIR are all independent or
explanatory variables.
This can
have its linear function as:
BD = β0 + β1
RGDP +
β2CAD + β3REXR + β4RIR
+ Ut ---------- 3.2
Where
β0 = Constant
or intercept
β1 = Gross
Domestic Product parameters
β2 = Current
Account Deficit parameters
β3 = Real
Exchange Rate parameter
β4 = Real Interest Rate parameter
ut = Stochastic
Error term
JUSTIFICATION OF THE MODEL
The preference of these techniques
in estimating the model is based on the fact that this work seeks to
investigate the nature of the relationship between budget deficits and economic
growth in Nigeria.
The model also seeks to analyze the
effect of macroeconomic variables on budget deficits. Thus, the ordinary Least Square
(OLS) technique is most suitable for the estimation of this model.
This work lays emphasis on the
statistical significance of the variables. Thus, the Ordinary Least Square
Estimation possesses the properties of Best Linear and Unbiased Estimator
(BLUE) and also minimum variance and mean squared error estimator
(Koutosyiannis, 1977). This technique is relatively simple to use in the
analysis of this study.
ESTIMATION TECHNIQUES
The major tasks in regression
analysis are to estimate the population regression function on the basis of
simple regression function as accurately as possible. This research has adopted
the econometric method of Ordinary Least Square (OLS).
Ordinary Least Square (OLS) is the
researcher’s choice of estimation. The statistical test of parameter estimates
will be conducted using their standard error, t-test, f-test, R2
(Coefficient of determination) and Durbin Watson (DW) test in order to enhance
the robustness of the result.
TECHNIQUES FOR EVALUATION OF RESULTS
According to Koutsoyiannis (1997),
there as three criteria, which are used in the process of evaluation with the
aim of ascertaining the estimates of the parameters are meaningful and
statically significant. These criteria, which are stated below, will be used in
the evaluation of the estimate obtained in this research work.
Economic Test (A Priori Expectation)
Under this criterion, the a priori
expectation (signs and sizes) of the parameter estimates of the variables in
the model will be evaluated to check whether they conform to economic theory.
The theoretical (a priori) expected sins of the macroeconomic variables used in
the model are stated below:
β1
is expected to have a positive sign because as government spends more than its
revenue, the economy tends to grow fast.
β2
is expected to have a positive sign because theoretically, budget deficit and
current account deficit are positively related.
β3
is expected to have either positive or negative sign in accordance with
Keynesian postulation in economic theory, that real exchange rate has a
bidirectional relationship with economic growth.
β4
is expected to have a negative sign because as budget deficit increases
interest rate decreases.
STATISTICAL (FIRST ORDER) TEST
The
coefficient of Determination (R2)
The R2 explains the total
variation of the dependent variables caused by variables in the explanatory
variables included in the model.
Student
T- Test
The test is used to check whether
the variables included in this study are significant or not in determining the
level of macroeconomic variables impact on budget deficit. Each element (parameters)
follows the t-distribution with n-k degree of freedom.
F-test
The test will be adopted to test the
overall significance of the regression model
Second
Order (Durbin Watson Test)
The Durbin Watson test is a test of
serial or autocorrelation in the mode. This test will also be conducted at 5%
level of significance.
Decision
Rule:
If the computed Durbin Watson
statistics is less than the tabulated value of the lower limit, there is
evidence of positive first order serial correlation. If it is greater than the
upper limit there is no evidence of positive first order serial correlation.
However, if it lies between the lower and upper limit, there is inconclusive
evidence regarding the presence or absence of positive first order serial
correlation.
SOURCE OF DATA
The date for this study is secondary
data sourced from Central Bank of Nigeria Statistical Bulleting and National
Bureau of Statistics.
SOFTWARE PACKAGE
The software package used for the
analysis of this study is E-view version 3.1.
READ RELATED TOPICS ON
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DEFICIT (TECHNIQUES, MODEL, STATISTICAL DATA