Because of the restrictive assumptions required to establish the theory of Ricardian equivalence, its relevance in practice is essentially an empirical question. The strongest direct evidence in favor of Ricardian equivalence is Roger Kormendi's (1983) article in the American Economic Review. That paper appeared to provide strong empirical support for Ricardian equivalence by showing that increases in government spending on goods and services depress consumer spending while changes in tax receipts have no effect on consumer spending. The present study shows that Kormendi's results are a misleading implication of the experience during World War I1 when shortages, rationing and patriotic appeals to self-restraint caused an abnormally high rate of saving at the same time that the government deficit-financed a uniquely massive increase in defense spending. When those years are excluded from the sample, Kormendi's results are reversed. The estimates presented here show that in the equation specified by Kormendi, but with the years 1941 through 1946 excluded, increases in tax receipts have had a substantial negative effect on consumption while increases in government spending on goods and services have had essentially no effect on consumption. This evidence is exactly the opposite of the implications of Ricardian equivalence. This conclusion is robust with respect to a variety of modifications in the way that the basic equation is estimated: using an AR1 correction to deal with serial correlation; limiting the analysis to the Federal government's fiscal variables; respecifying the variables as ratios to net national product to reduce collinearity; estimating for the most recent 35 years instead of for the period since 1931; and using an instrumental variable procedure to reduce the problem of endogeneity. In each of these specifications, the results indicate that taxes depress consumer spending while government outlays on goods and services have either a smaller or a totally insignificant effect.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
2355.
Length: Date of creation: Jul 1990 Date of revision: Publication status: published as "Government Debt, Government Spending, and Private Sector Behavior Revisited: Comment." From The American Economic Review, Vol. 80, No. 3,pp. 589-599, (June 1990). Handle: RePEc:nbr:nberwo:2355
Note: EFG PE ME Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Related research
Keywords:
References listed on IDEAS 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.:
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.)