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Abstract:
This study examined the theoretical and empirical relationship between bond-financed deficit and Price level Dynamics in Nigeria. The study employed quasi-experimental research design approach for the data analysis. This design combined theoretical consideration (a priori criteria) with empirical observations and extracted maximum information from the available data. It was expected that bond-finance deficit should be non-inflationary. The results of the data analysis and estimation were obtained using the parsimonious error correction mechanism. Contrary to a priori expectation, the result demonstrated a direct and significant relationship between bond-financed deficit and Price level dynamics in Nigeria. It shows that a 1% rise in government bond-financed deficit in the past period leads to 134% rise in the general prices levels. In other words, the bond-financed deficit determines increase in general prices levels by a high magnitudes. The result revealed that open market operation is not effective in Nigeria. The study however recommended that the policy makers should pay greater attention to the effectiveness of open market operation in Nigeria and put in place policies that will minimize the budget deficit and deficit financing.
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