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Testing Ricardian Neutrality with an Intertemporal Stochastic Model

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Author Info
Leonardo Leiderman
Assaf Razin

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Abstract

The purpose of this paper is to develop and estimate a stochastic-intertemporal model of consumption behavior and to use it for testing a version of the Ricardian-equivalence proposition with time series data. Two channels that may give rise to deviations from this proposition are specified: Finite horizons and liquidity constraints. In addition, the model incorporates explicitly the roles of taxes, substitution between public , and private consumption, and different degrees of consumer goods' durability. The evidence, based on data for Israel in the first half of the 1980s, supports the Ricardian neutrality specification, yielding plausible estimates for the behavioral parameters of the aggregate consumption function.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2258.

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Date of creation: Feb 1989
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Handle: RePEc:nbr:nberwo:2258

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References listed on IDEAS
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  1. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20. [Downloadable!] (restricted)
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  2. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  4. Reid, Bradford G, 1985. "Aggregate Consumption and Deficit Financing: An Attempt to Separate Permanent from Transitory Effects," Economic Inquiry, Oxford University Press, 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(1986-1), pages 1-60. [Downloadable!]
  6. Jacob A. Frenkel & Assaf Razin, 1986. "Deficits with Distortionary Taxes: International Dimensions," NBER Working Papers 2080, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. 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)
  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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  14. Seater, John J, 1982. "Are Future Taxes Discounted?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 376-89, August. [Downloadable!] (restricted)
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  16. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-23, March.
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(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. Becker, Torbjörn, 1995. "Government Debt and Private Consumption: Theory and Evidence," Working Paper Series in Economics and Finance 71, Stockholm School of Economics. [Downloadable!]
  2. António Afonso, 2008. "Euler testing Ricardo and Barro in the EU," Economics Bulletin, Economics Bulletin, vol. 5(16), pages 1-14. [Downloadable!]
    Other versions:
  3. Kenneth Kasa, 1994. "Finite horizons and the twin deficits," Economic Review, Federal Reserve Bank of San Francisco, pages 19-28. [Downloadable!]
  4. 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. [Downloadable!]
  5. 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. [Downloadable!]
  6. 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. [Downloadable!]
  7. David Romer, 1988. "What are the Costs of Excessive Deficits?," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 63-110 National Bureau of Economic Research, Inc. [Downloadable!]
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  8. Brunila, Anne, 1996. "Fiscal Policy and Private Consumption – Saving Decisions: Evidence from Finland," Research Discussion Papers 28/1996, Bank of Finland. [Downloadable!]
  9. Robert J. Barro, 1989. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Gerhard Reitschuler & Jesús Crespo Cuaresma, 2004. "Ricardian Equivalence Revisited: Evidence from OECD countries," Economics Bulletin, Economics Bulletin, vol. 5(16), pages 1-10. [Downloadable!]
  11. 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.. [Downloadable!]
  12. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal. [Downloadable!]
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