A Dynamic Analysis of the Link between Public Expenditure and Public Revenue in Nigeria and Ghana

Abstract

This paper investigated the nature of the relationship between government expenditure and government revenue for Nigeria and Ghana within a dynamic framework. The major empirical and methodological contribution of this study is the use of Dynamic Ordinary Least Squares (DOLS) proposed by Stock and Watson (1993). Dynamic OLS becomes better than OLS by coping with small sample and energetic sources of bias. An Engle-Granger two-step methodology for error correction was employed. The models for revenue and expenditure for the two countries reveal causation running in both directions to and from revenue and expenditure. However, the conclusion drawn from the study supports the fiscal synchronisation hypothesis which is in dissension with views held by earlier researchers. Further, results indicate that lagging, leading and coincident effects of revenue on expenditure and vice versa are present for the two countries. On the other hand, changes in expenditure have a negative impact on revenue for the Nigerian economy and a positive impact for the Ghanaian economy. Moreover, changes in past values of expenditure impact positively on changes in revenue. This finding is peculiar to the Nigerian economy.

Keywords: Dynamic ordinary least squares, fiscal synchronisation, hypothesis, error correction.