Government expenditure and macroeconomic stability conundrum in Zimbabwe

Abstract

The objective of this paper was to explore the effect of government expenditure growth on macroeconomic stability in Zimbabwe. Public expenditure has grown over time but as per a priori expectations, other macroeconomic variables have not been forth coming. What the country has actually experienced is prolonged macroeconomic instability. The paper contributes to the body of literature in two ways, (1) by creating a macroeconomic instability index and (2) by being the first in the Zimbabwean context to explore this conundrum. To achieve the main objective of the paper, the study used a cointegrated vector error correction model (VECM) and Granger causality with data spanning 1981 to 2019. The study did not find a statistically significant relationship between government expenditure and macroeconomic stability as argued mostly by the Keynesians. However, according to a priori expectations, the relationship turned out to be rightly negative. To buttress the Cointegrated-VECM results, granger causality tests were also conducted where no causality was found from government spending to macroeconomic stability, and vice versa (causality running from instability to government spending). This paper recommends that, Zimbabwe’s policy makers may need to consider proactive government spending or policies, since that helps the economy to successfully avoid possible risks such as macroeconomic instability. When policies are proactive rather than reactive, that helps by seizing untapped opportunities, and the economy justly avoids consequences of reactive governance.