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Public Debt and Private Consumption in OECD countries

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  • Gogas, Periklis

    ()
    (Democritus University of Thrace, Department of International Economic Relations and Development)

  • Papadimitriou, Theophilos

    ()
    (Democritus University of Thrace, Department of International Economic Relations and Development)

  • Plakandaras, Vasilios

    ()
    (Democritus University of Thrace, Department of International Economic Relations and Development)

Abstract

The recent ceiling of U.S. federal debt and the European sovereign debt crises raised once again the interest upon balanced government budgets. The Ricardian Equivalence proposition appears as an attractive alternative for policy makers, since postponing taxes to be paid once growth is restored seems a very efficient scheme that relieves public discomfort. This paper attempts to investigate the long-run relationship between public debt and private consumption in order to test for the potential validity of the Ricardian equivalence proposition. We use a wide dataset of fifteen OECD countries using annual data for the period 1980–2010. For the empirical estimation we employ both a univariate time series and a panel cointegration approach. Our empirical findings fail to provide empirical evidence in support of the Ricardian equivalence proposition for all countries of the sample, since the assumptions proposed by theory cannot be fulfilled.

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Bibliographic Info

Paper provided by Democritus University of Thrace, Department of Economics in its series DUTH Research Papers in Economics with number 1-2013.

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Length: 9 pages
Date of creation: 19 Mar 2013
Date of revision: 01 Feb 2014
Handle: RePEc:ris:duthrp:2013_001

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Postal: Department of Economics, University Campus, Komotini, 69100, Greece
Phone: (25310) 39.503
Fax: (25310) 39.502
Web page: http://www.econ.duth.gr/
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Related research

Keywords: Ricardian Equivalence; Consumption; Debt; VAR models; VEC models; Response function; Variance decomposition;

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  1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  2. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  3. 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.
  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.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Kostas Drakos, 2001. "Testing the Ricardian Equivalence Theorem: Time Series Evidence from Greece," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 149-160, June.
  7. Becker, Torbjörn, 1995. "Government Debt and Private Consumption: Theory and Evidence," Working Paper Series in Economics and Finance 71, Stockholm School of Economics.
  8. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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