Deficit Financing and Economic Welfare in Nigeria: A Formal Test of the Ricardian Equivalence Hypothesis (REH)
EwereF.O.Okungbowa1 & David Umoru2, AERC, FMNES
1Department of Economics, Banking and Finance, Benson Idahosa University, Benin City, Nigeria
2Department of Economics, Faculty of Arts, Management & Social Sciences, Edo University Iyamho,david.umoru@edouniversity.edu.ng
ABSTRACT
This study tests empirically whether Nigeria is Ricardian economy using ARDL Bounds test approach within the period of 1980-2017. The study revealed that REH holds in Nigeria and that swap of debt for tax asoption for financing budget impact less on aggregate demand of citizens. It was also statistically insignificant thereby supporting presence of REH and not the conventional Keynesian view. Indication is that a farsighted and rational individual will not increase her consumption when tax is low because such an individual is aware that the debt will be redeemed in a future date through higher taxes. Hence, substitution of deficit for tax is seen as just a tax timing differencebecause, current debt neutralizes futurehigher taxes.Based on result, we recommend that government should change use of deficit financing as fiscal policy measure that she employs in improving welfare of citizens in Nigeria.
Keywords: Debt, consumption, tax, government expenditure, budget constraint.JEL classification: E21, E62, D61
