Domestic debt, public spending and economic growth in Nigeria: a mediation analysis

Abstract

PurposeThis study is aimed at interrogating the mediation role of public spending in domestic debt and economic growth nexus, drawing on debt overhang theory and the Keynesian view.Design/methodology/approachThe study deployed a time series data (from 1981 to 2020) set drawn from the 2021 Central Bank of Nigeria (CBN) statistical bulletin. The mediation effect of public spending was tested by performing structural equation modeling after pre-estimation Augmented Dickey-Fuller unit root test.FindingsOverall, the study outcomes indicate that domestic debt and public spending have significant positive effects on economic growth. Additionally, the study finds public spending to partially mediate domestic debt and economic growth nexus.Practical implicationsThis study's outcomes provide insights that will enable fiscal policymakers to focus on internal borrowing, keep it under strict control to avert crowding out effects and improve public spending on productive projects to stimulate economic growth.Originality/valueAs the first study to question the mediation effect of public spending in domestic debt-economic growth relationship, it deepens and extends extant literature on domestic debt-economic growth nexus.