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Testing Ricardian Neutrality with an Intertemporal Stochastic Model

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  • Leiderman, Leonardo
  • Razin, Assaf

Abstract

This paper's purpose is to develop and estimate a stochastic, intertemporal model of consumption be havior and to use it for testing a version of the Ricardian-equivalen ce proposition with time-series data. Two channels that may give rise to deviations from this proposition are specified: finite horizons a nd liquidity constraints. In addition, the model incorporates explici tly the roles of taxes, substitution between public and private consu mption, and different degrees of consumer goods' durability. The evid ence, based on data for Israel in the first half of the 1980s, suppor ts the Ricardian neutrality specification, yielding plausible estimat es for the behavioral parameters of the aggregate consumption functio n. Copyright 1988 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 20 (1988)
Issue (Month): 1 (February)
Pages: 1-21

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Handle: RePEc:mcb:jmoncb:v:20:y:1988:i:1:p:1-21

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  2. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  4. Reid, Bradford G, 1985. "Aggregate Consumption and Deficit Financing: An Attempt to Separate Permanent from Transitory Effects," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 475-86, July.
  5. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
  6. Jacob A. Frenkel & Assaf Razin, 1986. "Deficits with Distortionary Taxes: International Dimensions," NBER Working Papers 2080, National Bureau of Economic Research, Inc.
  7. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
  8. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  9. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  10. James M. Poterba & Lawrence H. Summers, 1986. "Finite Lifetimes and the Crowding Out Effects of Budget Deficits," NBER Working Papers 1955, National Bureau of Economic Research, Inc.
  11. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
  12. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  13. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  14. Elhanan Helpman & Assaf Razin, 1987. "Exchange Rate Management: Intertemporal Tradoffs," NBER Working Papers 1590, National Bureau of Economic Research, Inc.
  15. Seater, John J, 1982. "Are Future Taxes Discounted?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 376-89, August.
  16. Walter Dolde & James Tobin, 1971. "Wealth, Liquidity, and Consumption," Cowles Foundation Discussion Papers 311, Cowles Foundation for Research in Economics, Yale University.
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Citations

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Cited by:
  1. Becker, Torbjörn, 1995. "Government Debt and Private Consumption: Theory and Evidence," Working Paper Series in Economics and Finance 71, Stockholm School of Economics.
  2. António Afonso, 2008. "Euler testing Ricardo and Barro in the EU," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-14.
  3. Kenneth Kasa, 1994. "Finite horizons and the twin deficits," Economic Review, Federal Reserve Bank of San Francisco, pages 19-28.
  4. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers 728, Queen's University, Department of Economics.
  5. Michel Normandin, 1996. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Macroeconomics 9607001, EconWPA.
  6. Brunila, Anne, 1996. "Fiscal Policy and Private Consumption – Saving Decisions: Evidence from Finland," Research Discussion Papers 28/1996, Bank of Finland.
  7. repec:ebl:ecbull:v:5:y:2004:i:16:p:1-10 is not listed on IDEAS
  8. Khalid, Ahmed M., 1996. "Ricardian equivalence: Empirical evidence from developing economies," Journal of Development Economics, Elsevier, vol. 51(2), pages 413-432, December.
  9. Kandil, Magda, 2001. "Asymmetry in the effects of us government spending shocks: evidence and implications," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(2), pages 137-165.
  10. Romer, D., 1988. "What Are The Costs Of Excessive Deficits?," Papers 14, Princeton, Woodrow Wilson School - Discussion Paper.
  11. repec:ebl:ecbull:v:5:y:2008:i:16:p:1-14 is not listed on IDEAS
  12. Leanne Ussher, 1998. "Do Budget Deficits Raise Interest Rates? A Survey of the Empirical Literature," Working Papers 0005 Classification- JEL:, Department of Economics, Queens College of the City University of New York.
  13. Hannes Kaadu & Lenno Uusküla, 2004. "Liquidity Constrains and Ricardian Equivalence in Estonia," Bank of Estonia Working Papers 2004-7, Bank of Estonia, revised 10 Oct 2004.
  14. Aqdas Ali Kazmi, 1994. "Private Consumption, Government Spending, Debt Neutrality: Resolving Kormendi- Feldstein-Modigliani Controversy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 33(4), pages 1055-1071.
  15. Reitschuler, Gerhard, 2008. "Assessing Ricardian equivalence for the New Member States: Does debt-neutrality matter?," Economic Systems, Elsevier, vol. 32(2), pages 119-128, June.
  16. António Afonso, 2001. "Government indebtedness and european consumers behaviour," Working Papers 2001/12, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..

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