An Empirical Testing Of The Ricardian Equivalence In Namibia

Abstract

The study aims to empirically test the Ricardian Equivalence hypothesis in Namibia, using quarterly time-series data from 1991 quarter one to 2017 quarter four. The annual data was converted from annual to quarterly by using Eviews 10 software. Consumption function was used to test for Ricardian Equivalence Hypothesis by testing how government debt and tax affect consumption. Additional control variables such as inflation, government expenditure, population growth and income were included in the analysis. Data analysis included testing variables for unit roots. The autoregressive distributed lag model approach was utilised. ARDL model and bounds test for cointegration were used to determine the long-run relationships between variables as well as variables’ long-run coefficients, which determine long-run impact of independent variables on consumption. The error correction model was used to determine the short-run coefficients, which determine the impacts of independent variables on consumption in a short-run as well as measuring the convergence of the model toward its long-run equilibrium. The results indicate a positive relationship between government debt and consumption in both short-run and long-run, which is inconsistent with the Ricardian Equivalence Hypothesis. The study found that tax has a significant negative effect on consumption in the short-run, which is inconsistent with the Ricardian Equivalence Hypothesis. It was also concluded that there is a long-run relationship between consumption and the explanatory variables. It can be generally concluded that the Ricardian Equivalence Hypothesis does not hold in the Namibian economy both in the short run as well as in the long-run. Policy implications emanating from the study indicate that it is worth increasing government spending to stimulate the economy through debt financing since Ricardian Equivalence Hypothesis does not hold in Namibia. The study recommends policymakers to encourage further researches on testing the Ricardian Equivalence in Namibia since it will help improve decision making on fiscal policy.