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Does The Constraint In The Matrix Of Long Run Effects Bias The Ricardian Equivalence Test?

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  • GHASSAN, Hassan

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Abstract

The purpose of this paper is to test the Ricardian Equivalence Hypothesis REH by estimating a SVAR model. In this framework, we separate the co-movements of saving rate and budget deficit rate into two shocks, associated with structural parameters, as if we were looking for ‘‘two needles in haystack’’. We avoid imposing formal short and long run constraints, because these may overestimate the compensation rate and bias the estimation of structural multipliers. Our results suggest that REH is applicable to Moroccan economy, since private saving compensates a large fraction i.e. 90% of the shock in budget deficit, which may handicap the economic development.

Suggested Citation

  • GHASSAN, Hassan, 2007. "Does The Constraint In The Matrix Of Long Run Effects Bias The Ricardian Equivalence Test?," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1).
  • Handle: RePEc:eaa:aeinde:v:7:y:2007:i:1_10
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    References listed on IDEAS

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    1. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-442, October.
    2. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
    3. Poterba, James M. & Summers, Lawrence H., 1987. "Finite lifetimes and the effects of budget deficits on national saving," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 369-391, September.
    4. Domenech, Rafael & Taguas, David & Varela, Juan, 2000. "The effects of budget deficit on national saving in the OECD," Economics Letters, Elsevier, vol. 69(3), pages 377-383, December.
    5. Becker, Torbjorn, 1997. "An investigation of Ricardian equivalence in a common trends model," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 405-431, August.
    6. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
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    1. repec:ksp:journ5:v:4:y:2017:i:3:p:372-381 is not listed on IDEAS

    More about this item

    Keywords

    Budget deficit; Saving; Ricardian Equivalence; Structural shock; SVAR.;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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