IIARD International Institute of Academic Research and Development

IIARD International Journal of Economics and Business Management (IJEBM )

E-ISSN 2489-0065
P-ISSN 2695-186X
VOL. 3 NO. 8 2017

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Simultaneous Equation Modeling and Estimation of Consumption and Investment Functions in Nigeria

Godwin Lebari Tuaneh and Isaac Didi Essi

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Abstract

The study applied simultaneous equation in modelling and estimating consumption and investment function in Nigeria. Specifically, the study ascertained the trend of study variables within the period of the study, established the effects of affluence on private consumption expenditure as well as determined the marginal propensity to consume, and determined the effects of interest rates and affluence on Domestic Private Investment. The study adopted the quasi experimental design, on time series data from 1983 to 2016. Models were specified accordingly, the data were subjected to diagnostic test before the main analytical techniques were applied. The OLS result of the private consumption expenditure Model was somewhat different from the 2SLS and the 3SLS results, the 2SLS, and the 3SLS results were identical. All results of the domestic private investment model were somewhat different, however, the 2SLS, and the 3SLS results agreed closely. It was observed from this study that standard errors in OLS results were less than their 2SLS and 3SLS counterparts. Affluence was significant in affecting private consumption expenditure within the period of the study (t-cal =7.485, 0.000 < 0.05), Previous year domestic private investment was not (t-cal =0.120, 0.9050 > 0.05). Affluence and previous year Affluence (t-cal = 8.962, 0.000 < 0.05) and (t- cal = -6.412, 0.000 < 0.05) significantly affected domestic private investment, interest rate however did not (t-cal = 1.164, 0.000 < 0.05). It was consequently recommended that right hand side variables should be tested for endogeneity before decision on single equation or system equation estimation. Since affluence significantly affected private consumption expenditure and domestic private investment within the period of the study, it was necessary to formulate policies to increase per capita income

keywords:

Simultaneous Equation, Two Stage Least Squares (2SLS), Three Stage Least Squares (3SLS), Consumption function, Investment function.

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