Dynamic Effects of Fiscal Policy on Output in Rwanda

Abstract

This paper aimed to analyze the dynamic effect of various components of fiscal policy on output in Rwandan economy from 1990 to 2022. Differently several researchers argue that fiscal policy affect positively and negatively the output, in long run and in short run, the growth in the economy. These theories have used in this study Keynesian Theory, suggests that fiscal policy can have a significant effect on output, especially during economic downturns, Ricardian Equivalence theory argues that individuals have rational expectations about future taxes and government spending and New Keynesian theory emphasizes the importance of price and wage rigidities in shaping the effects of fiscal policy on output. The estimation technique employed is the ARDL together with ECM. This study used secondary data collected from world bank database, these data were time series data as the study used annual data. Using Eviews 13, the econometrics technique of ADF Test was used to test the stationarity. The stationarity test was done so as to ensure whether to conduct the co integration test or not. Having purely results of unit root test at first different allowed the researcher to adopt ARDL bound test of co integration. The results of ARDL bound test indicated the existence of a long run relationship among the series of the study. The findings from ARDL ECM indicated that there is a significant short run relationship among the variables of the study. With R-square of 0.84, it is evident that all variables together Couse variation of 84% to the dependent variable GDP in short run, other factors remaining constant and the negative coefficient of -0.036 implies that as long as the time will go the error will be correct. This study reveals that the activities in the fiscal policy can affect positively on output. The results of post estimation tests show that there is no multi collinearity, no heteroscedasticity, the model are specified by using Ramsey resort test, data are stable and errors are normally distributed which mean that we don’t have spurious regression and we have good forecast in this work. This study reveals that the activities in the fiscal policy can impact positively on the economic growth. Some recommendation has been given to the regulatory Authority and government of Rwanda that should initiate the policies that would encourage more investors to come to invest in the country in order to access the more tax and also be more proactive in their surveillance of collecting tax which will facilitate in long run the entry of new business in Rwandan market in order to increase GDP of country.