The crowding out hypothesis: Evidence from Nigeria (1980–2010)

This study investigated the crowding out hypothesis in Nigeria covering the period 1980–2010, focusing on the private investment implications of government borrowing. Government deficit financing using domestic debt has been a controversial issue in Public Finance, it is therefore imperative that an empirical answer is presented on the question of crowding out of private investment. The strategic role of private investment in stabilization of the economy cannot be over-emphasized hence the need to show empirically if there is a case of crowding in or crowding out. With the aid of e-view software, the data estimation revealed that all the explanatory variables were stationary at I(1) and include the variables namely, interest rate, money supply, total government deficit financing and total bank credit to the private sector while the result of the co-integration suggested a long-run relationship between the variables. Further revelations indicate that the relationship between the explanatory variables and private investment is statistically significant at 1%. However, there is evidence of the “crowding out” effect of private investment in Nigeria resulting only from the money supply, as shown by its negative coefficient. Thus, the study concludes that only credit to the private sector and Money Supply appears to have met the a priori expectation. Therefore, the study recommends that monetary authorities should endeavor to promote policies that strike at the right level of money supply necessary to support private investment growth in Nigeria.