Impact of Public Debt on Inflation and Unemployment in Nigeria: An ARDL Vector Error Correction Model

Debt is an important source of government funds in developed and developing countries. In developed countries, debt is an important source of money for bridging the gap between government revenues and expenditures. This paper measures the impact of public debt on inflation and unemployment in Nigeria during the period 1985 to 2020. It uses annual data of 36 years range to conduct various types of econometric tests. It uses Autoregressive Distributive Lag model (ARDL) Error Correction Model (ECM) for the analysis of the data. Unit root tests and Granger causality tests were also conducted to test the efficacy and predictive capability of the model. The findings of the study show that long run relationship exists between public debt and unemployment in Nigeria. It shows that increase in public debt causes more unemployment, but that external debt causes more unemployment than domestic debt. But the results of cointegration analysis show absence of relationship between public debt and inflation. The paper recommends reduction in public debt and if at all government must borrow, then it shall give priority to domestic debt over foreign debt.