Common stochastic trends and the Ricardian Equivalence in the OECD
AbstractA common topic of research amid the financial crisis is the ability of households to respond to the increased taxes and intense fiscal austerity. This ongoing dilemma about the right path to growth revived the interest about Ricardian Equivalence. The theorem states that with given government consumption, the consumption of households should be stable to compensate for future debt and taxes. In this way, the need for liquidity resulting from financial instability would be compensated by household savings. The paper attempts to investigate the long-run relationship between public debt and private consumption. The dataset under examination consists of fifteen OECD countries. Using a multivariate Johansen VECM approach with annual data for the period 1980 – 2010 we find evidence in support of the Ricardian equivalence proposition (the existence of a positive relationship between debt and consumption) for only four countries: Australia, Canada, Iceland and the U.S. For the rest of the countries the Ricardian equivalence is rejected.
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Bibliographic InfoPaper provided by Democritus University of Thrace, Department of Economics in its series DUTH Research Papers in Economics with number 1-2013.
Length: 9 pages
Date of creation: 19 Mar 2013
Date of revision:
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More information through EDIRC
Ricardian Equivalence; Consumption; Debt; VAR models; VEC models; Response function; Variance decomposition;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-23 (All new papers)
- NEP-FDG-2013-03-23 (Financial Development & Growth)
- NEP-MAC-2013-03-23 (Macroeconomics)
- NEP-ORE-2013-03-23 (Operations Research)
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