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Is the Ricardian Equivalence Proposition an ‘Aerie Fairy’ Theory for Europe?

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  • JESÚS CRESPO CUARESMA
  • GERHARD REITSCHULER

Abstract

Using a theoretical model based on dynamic optimizing agents, we test empirically the Ricardian equivalence proposition (REP) for the EU‐15 countries. The theoretical setting allows us to obtain estimates of the structural parameters of the model and to test directly the hypothesis implied by the REP. Using recently developed end‐of‐sample cointegration breakdown tests, we find evidence of a change in the fiscal behaviour of individuals during the last decade—after the introduction of a fiscal rule, namely the Maastricht criteria—for most countries in the sample. The results concerning the direction of change are mixed.

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  • Jesús Crespo Cuaresma & Gerhard Reitschuler, 2007. "Is the Ricardian Equivalence Proposition an ‘Aerie Fairy’ Theory for Europe?," Economica, London School of Economics and Political Science, vol. 74(296), pages 682-694, November.
    • Handle: RePEc:bla:econom:v:74:y:2007:i:296:p:682-694
    DOI: 10.1111/j.1468-0335.2007.00588.x
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    1. repec:ebl:ecbull:v:5:y:2004:i:16:p:1-10 is not listed on IDEAS
    2. Waqas, Muhammad & Awan, Masood Sarwar, 2011. "Are Pakistani Consumers Ricardian?," MPRA Paper 35375, University Library of Munich, Germany.
    3. Daniel Choi & Mark Holmes, 2014. "Budget deficits and real interest rates: a regime-switching reflection on Ricardian Equivalence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(1), pages 71-83, January.
    4. Waqas, Muhamad & Awan, Masood Sarwar & Aslam, Muhammad Amir, 2011. "We are living on the cost of our children," MPRA Paper 32044, University Library of Munich, Germany.
    5. Aristovnik, Aleksander & Djurić, Sandra, 2010. "Twin deficits and the Feldstein-Horioka puzzle: a comparison of the EU member states and candidate countries," MPRA Paper 24149, University Library of Munich, Germany.
    6. Gerhard Reitschuler, 2010. "Fiscal Policy And Optimal Taxation: Evidence From A Tax Smoothing Exercise," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(2), pages 238-252, May.

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