Abstract
The objective of this paper is to test the existence of Ricardian
Equivalence in Lesotho using annual data for two sample periods, 1980–2014
and 1988–2014. This proposition is important and has crucial implications for tax
policy. Household consumption, government debt, government expenditure, GDP
per capita, population growth and inflation are variables which are used for this
analysis. The study used ARDL cointegration approach to investigate the relationship
between these variables. The study found that there is long run equilibrium
relationship among the variables in two sample periods. The results show that an
increase in government debt or government expenditure will decrease household
consumption per capita. This implies that the Ricardian Equivalence does hold for
Lesotho. The results also imply that fiscal policy is an ineffective tool to stabilize
the economy. Lesotho has limited fiscal flexibility, and it will be difficult or challenging
to increase private consumption and economic growth, particularly during
economic downturn.