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Ricardian equivalence hypothesis: Evidence from Pakistan


  • Muhammad Afzal

    (Department of Management Sciences, COMMSATS Institute of Information Technology, Islamabad- Pakistan)


This paper provides empirical evidence on the soundness and relevance of the Ricardian equivalence hypothesis (REH) for Pakistan over the period 1960__2009. Time series properties have been examined in order to take care of the criticism made against the previous studies on REH notably model-specification, simultaneity bias and stationarity of data. Real income, real consumption, real government expenditure and real government revenue, though nonstationary, are not cointegrated. There is unidirectional causality from real income to real consumption, real government expenditure and real government revenue and from real government expenditure to real government revenue. We used impulse response functions to ascertain the impact of shocks of one variable upon others. The impact of real government expenditure and real government revenue on consumption is most notable and substantial that provides some support in favour of the REH. This happens in the short-run. Stabilization policies are adopted that aim at averting those shocks that harm the economy substantially in the short-run.

Suggested Citation

  • Muhammad Afzal, 2012. "Ricardian equivalence hypothesis: Evidence from Pakistan," E3 Journal of Business Management and Economics., E3 Journals, vol. 3(6), pages 258-265.
  • Handle: RePEc:etr:series:v:3:y:2012:i:6:p:258-265

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    References listed on IDEAS

    1. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
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    4. Bayoumi, Tamim & Masson, Paul R, 1998. "Liability-Creating versus Non-liability-Creating Fiscal Stabilisation Policies: Ricardian Equivalence, Fiscal Stabilisation, and EMU," Economic Journal, Royal Economic Society, vol. 108(449), pages 1026-1045, July.
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    6. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    7. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, June.
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    9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
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    More about this item


    Ricardian Equivalence; Granger-causality; Impulse Response Functions. JEL Classification: H3;

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents


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