Review of Ricardian Equivalence in Theory and Practice: Empirical Data from Nigeria

Abstract

This study investigates the Ricardian Equivalence (RET) in theory and practice particularly as it relates to Nigeria economy. The study employed Autoregressive Distributed Lagged (ARDL) model to establish both the long-run and short-run relationship between deficit financing and consumption. The study found no strong evidence to reject the Ricardian Equivalence using data from Nigeria economy contrary to most literatures reviewing RET in Nigeria. Specifically, the study found that deficit financing variables like debt, tax revenue, and government expenditure have significant impact on consumption when the strict assumption of RET is not introduced in the model but became insignificant when ratio of tax revenue to changes in debt is introduced in the model. The study therefore concludes that Ricardian Equivalence is valid in the case of Nigeria when strict assumption of RET is maintained but insignificant when the major assumption of RET is relaxed or when deficit finance variables enter the model indirectly. The study therefore recommends that while government embraces deficit financing to stimulate the economy, it should be done with utmost care not induce stagflation thereby eroding the small gain from the stimulation.