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Euler Testing Ricardo and Barro in the EUs

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Author Info
António Afonso

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Abstract

According to Keynesian economics wisdom, government debt has an effect on the economy since consumers see government debt as net wealth. However, according to the debt neutrality hypothesis of Ricardo (1817), popularised by Barro (1974), such effects would be absent. This paper’s results, obtained from Euler equation estimations using a panel data approach, indicate that it would be wise to reject the debt neutrality hypothesis for the EU and that higher government indebtedness could actually deter private consumption.

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Paper provided by Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon. in its series Working Papers with number 2008/23.

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Date of creation: Apr 2008
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Handle: RePEc:ise:isegwp:wp232008

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Postal: Department of Economics, School of Economics and Management (ISEG), Technical University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: http://www.iseg.utl.pt/departamentos/economia/

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Related research
Keywords: debt neutrality private consumption EU panel data

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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  1. Dalamagas, Basil A, 1992. "How Rival Are the Ricardian Equivalence Proposition and the Fiscal Policy Potency View?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(4), pages 457-76, November.
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  5. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March. [Downloadable!] (restricted)
  6. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
    Other versions:
  8. Rockerbie, Duane W, 1997. "Are Consumers Ricardian When Some Are Liquidity Constrained? Evidence for the United States," Applied Economics, Taylor and Francis Journals, vol. 29(6), pages 821-27, June. [Downloadable!] (restricted)
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  13. Gupta, Kanhaya L, 1992. "Ricardian Equivalence and Crowding Out in Asia," Applied Economics, Taylor and Francis Journals, vol. 24(1), pages 19-25, January.
  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)
  15. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October. [Downloadable!] (restricted)
  16. Khalid, Ahmed M., 1996. "Ricardian equivalence: Empirical evidence from developing economies," Journal of Development Economics, Elsevier, vol. 51(2), pages 413-432, December. [Downloadable!] (restricted)
  17. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 983-1004, October. [Downloadable!] (restricted)
  18. Himarios, Daniel, 1995. "Euler equation tests of Ricardian equivalence," Economics Letters, Elsevier, vol. 48(2), pages 165-171, May. [Downloadable!] (restricted)
  19. George A. Akerlof, 2007. "The Missing Motivation in Macroeconomics," American Economic Review, American Economic Association, vol. 97(1), pages 5-36, March.
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This page was last updated on 2008-7-2.

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