The Keynesian-Ricardian Dichotomy on Budget Deficits in Nigeria

Abstract

This research work takes its motive from recent literature concerning the debate on the Keynesian proposition and the Ricardian equivalence, employing data from the Nigerian economy and applying cointegration analysis, Granger causality tests and impulse response functions (IRF). The aim of the econometric methodology is to derive robust results by means of using alternative quantitative techniques. Both the shortrun empirical findings using VEC and IRF and the longrun empirical findings using Johansen technique are in line with the Keynesian proposition. The Granger causality test using pair-wise Granger causality was also employed to test if there is causality between interest and budget deficit and to know the direction of causality (if it exits) the result reveals the independence of BD and RIR in both the regressions except at lag 6 and 8 where there is a unidirectional causality from RIR to BD. The message that a change in budget deficit implies no effect on the rate of interest supports the theoretical grounds of the Ricardian equivalence hypothesis. Overall, the empirics are in accord with both the logic of the Keynesian proposition and that of the Ricardian equivalence hypothesis