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Ricardian equivalence, expansionary fiscal contraction and the stock market: a VECM approach

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Author Info
Gianluigi Giorgioni
Ken Holden
Abstract

The effect of government taxation on future consumption has been explained in three ways: the Keynesian approach, the Ricardian Equivalence proposition and the German view of Expansionary Fiscal Contraction (EFC). This paper reports empirical evidence on the validity of these explanations by examining the impact of a shock in government taxation upon private consumption, once the effect of the stock market is removed. A vector error-correction model is estimated for the USA, Japan, Germany, France, the UK, Italy and Canada for 1950-1997 and the impulse response functions of a shock in taxation and in expenditure are examined. The responses to an increase in government taxation appear to lend support to the EFC, while the responses to an increase in government expenditure upon consumption suggest that the reaction of private consumption is more in line with the traditional Keynesian approach.

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Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 12 (August)
Pages: 1435-1443
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Handle: RePEc:taf:applec:v:35:y:2003:i:12:p:1435-1443

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  4. Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March. [Downloadable!] (restricted)
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  5. Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, vol. 65(2), pages 147-162, August. [Downloadable!] (restricted)
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  6. Feldstein, Martin & Elmendorf, Douglas W, 1990. "Government Debt, Government Spending, and Private Sector Behavior Revisited: Comment," American Economic Review, American Economic Association, vol. 80(3), pages 589-99, June. [Downloadable!] (restricted)
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  11. Carmichael, Jeffrey, 1982. "On Barro's Theorem of Debt Neutrality: The Irrelevance of Net Wealth," American Economic Review, American Economic Association, vol. 72(1), pages 202-13, March.
  12. Robert J. Barro, 1996. "Reflections on Ricardian Equivalence," NBER Working Papers 5502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
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  17. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yu Hsing, 2005. "Application of the IS-MP-IA model to the German economy and policy implications," Economics Bulletin, Economics Bulletin, vol. 15(5), pages 1-10. [Downloadable!]
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