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Debt neutrality: theory and evidence from developing countries

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  • Reginald Darius

Abstract

This paper reviews the Ricardian-Barro hypothesis and tests the basic postulate of the model for a sample of developing countries including Mexico and Venezuela. Two specifications are utilized, the first is based on the simple consumption model associated with the work of Kormendi (1983). The alternative is based on a model developed by Haque and Montiel (1987). The outcome of the two-stage least square estimation technique rejected the hypothesis in Mexico, Trinidad and Tobago and Venezuela, all countries, which underwent adjustment programmes. However these results were reversed when the alternative model was utilized due to liquidity constraint and possibly the Yaari-Blanchard effect. The contradictory outcome alludes to the sensitivity of the results to the model specified.

Suggested Citation

  • Reginald Darius, 2001. "Debt neutrality: theory and evidence from developing countries," Applied Economics, Taylor & Francis Journals, vol. 33(1), pages 49-58.
  • Handle: RePEc:taf:applec:v:33:y:2001:i:1:p:49-58
    DOI: 10.1080/00036840122044
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    References listed on IDEAS

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    1. Leiderman, Leonardo & Razin, Assaf, 1988. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 1-21, February.
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    Cited by:

    1. Yu Hsing, 2004. "Impacts of macroeconomic policies on the Mexican output," Global Economic Review, Taylor & Francis Journals, vol. 33(1), pages 85-94.
    2. Hannes Kaadu & Lenno Uuskula, 2004. "Liquidity Constrains and Ricardian Equivalence in Estonia," Bank of Estonia Working Papers 2004-7, Bank of Estonia, revised 10 Oct 2004.
    3. Reitschuler, Gerhard, 2008. "Assessing Ricardian equivalence for the New Member States: Does debt-neutrality matter?," Economic Systems, Elsevier, vol. 32(2), pages 119-128, June.
    4. Tomas Wroblowsky, 2007. "Explaining the Variability of Debt Neutrality Tests Results: A Meta-Analysis of Ricardian Equivalence," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 5(1), pages 7-24.

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