Exchange Rate, Interest Rate and Ricardian Equivalence Hypothesis: Evidence from Nigeria

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