Analysising the effects of budget deficit dynamics on macroeconomic variables in Namibia

Abstract

This study analysed the effect of budget deficit dynamics on economic growth (gross domestic product), unemployment and interest rate in Namibia. The study employed the Autoregressive Distributed Lag Model (ARDL) and Bounds test for the cointegration approach using time series annual data for the period 1990 – 2018. The cointegration results confirm the presence of a long run relationship among variables in all models. In order to capture the short run effects of the budget deficit, the study employed the error correction model (ECM) and decisions were made based on a five percent level of significance. Focusing on the core explanatory variable which is budget deficit, the empirical results discovered a negative and significant relationship between budget deficit and economic growth both in the short and long run period, implying that high deficit deteriorates the growth rate of the economy. Moreover, the results show a direct but insignificant relationship between deficit and unemployment rate in short and long run period in Namibia. In addition, budget deficits show a negative but insignificant relationship towards real interest rate in both the short and long run period. As a result, the study resolved that the Neoclassical theory holds in Namibia. Consequently, in order to contain this adverse effect, the government should ensure that the exacerbated level of budget deficit is addressed.