Abstract
The validity of Ricardian Equivalence Hypothesis (REH) in Nigeria has been tested by bringing into play quarterly data of exchange and interest rates. The study was motivated basically by the need to examine the short and long run dynamics between the variables streaming from exchange and interest rates to government budget deficit and government debt using Autoregressive Distributed Lag (ARDL) bounds technique developed by Pesaran, Shin and Smith. The estimation results from Wald-test confirmed that, government budget deficit and government debt are not equal to zero. Therefore, the null hypothesis of REH holding in Nigerian has been refuted in order to uphold the efficacies of fiscal policy in macroeconomic stabilization. To this effect, it become obvious that Nigerian consumers respect the performance of fiscal policy and treat government debt as net wealth by increasing their consumption once there is a rise in income either via debt or tax cut. DOI: 10.5901/mjss.2016.v7n5p58
Highlights
The current debate in both developing and developed economies is the challenge posed by large budget deficits and substantial government debt which attracted the attention of policy makers to the question of how much and fast shortfall can be reduced to revamp an economy
Below, the Dickey-Fuller generalized least square (DF-GLS) unit root test results revealed that, all the variables are I(1) or the variables are stationary after the first difference
The study examined the validity of Ricardian Equivalence Hypothesis by analyzing the impact of exchange and interest rates on government budget deficit and government debt between 1981Q1 and 2013Q4 using Autoregressive Distributed Lag (ARDL) bounds method
Summary
The current debate in both developing and developed economies is the challenge posed by large budget deficits and substantial government debt which attracted the attention of policy makers to the question of how much and fast shortfall can be reduced to revamp an economy. The Keynesian school of thought argues that consumers treat government debt as net wealth because swap in the use of tax for debt influences private aggregate demand private consumption positively (Marinheiro, 2001; Afonso, 2008; Afzal, 2012). This led to the crowding out of private investment as a result of the fall in private and national savings which have been predicated by an increase in real interest rate. Private savings increase by equal amount as budget deficit while national savings remain unaltered, private investment will not be crowded out
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