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Testing Ricardian Neutrality with an Intertemporal Stochastic Model

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Leonardo Leiderman
Assaf Razin
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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Publication status: published as Journal of Money, Credit and Banking, Vol. 20, No. 1, (February 2000). Financial Crises in Emerging Markets, Glick, Reuven, Ramon Moreno and Mark Speigel, eds., Cambridge: Cambridge University Press, 2000, chapter 8.
Handle: RePEc:nbr:nberwo:2258

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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)
  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)
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  4. 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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  5. 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.
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  7. 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!]
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  9. Jacob A. Frenkel & Assaf Razin, 1986. "Deficits with Distortionary Taxes: International Dimensions," NBER Working Papers 2080, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. 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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  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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  17. 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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