Testing the Ricardian equivalence hypothesis in the case of Ethiopia: An autoregressive-distributed lag approach

Beyene, Sisay Demissew and Kotosz, Balázs (2020) Testing the Ricardian equivalence hypothesis in the case of Ethiopia: An autoregressive-distributed lag approach. Hungarian Statistical Review, 3 (2). pp. 26-49. ISSN 2630 9130

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Abstract

The Ricardian equivalence hypothesis (REH) suggests that when the government attempts to stimulate the economy by raising debt-financed government spending, consumption and demand do not increase but rather remain the same. The objective of this study is to test the existence of the REH in Ethiopia, using annual data from 1990 to 2011 and by employing the autoregressive-distributed lag cointegration approach. The study includes three variables (budget deficit, government consumption expenditure, and government debt) which contribute to the REH along with another variable. The results show that only the budget deficit and government consumption expenditure fulfil the REH. However, government debt fails to fulfil it. Thus, limited evidence of the existence of the REH is found in Ethiopia.

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