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Liquidity Constrains and Ricardian Equivalence in Estonia

  • Hannes Kaadu

    ()

  • Lenno Uusküla

    ()

This paper aims to find evidence of the influence of government deficit on private consumption in Estonia. The data only shows some support for Ricardian equivalence. Two approaches were used in the empirical tests. The Haque and Montiel (1989) equation of consumption was estimated using an instrumental variables technique. The Aschauer (1985) system of equations was estimated with the full information maximum likelihood method. Formal tests based on macro data could neither reject nor confirm the existence of liquidity constraints or Ricardian equivalence. There remains a lot of room for testing both of these hypotheses in Estonia. Further efforts to test liquidity constraints should concentrate on using micro data.

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File URL: http://www.eestipank.ee/sites/eestipank.ee/files/publication/en/WorkingPapers/2004/_wp_704.pdf
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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2004-7.

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Date of creation: 10 Oct 2004
Date of revision: 10 Oct 2004
Publication status: published
Handle: RePEc:eea:boewps:wp2004-07
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  1. Stock, James H. & West, Kenneth D., 1988. "Integrated regressors and tests of the permanent-income hypothesis," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 85-95, January.
  2. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
  3. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
  4. Leonardo Leiderman & Assaf Razin, 1987. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," NBER Working Papers 2258, National Bureau of Economic Research, Inc.
  5. Agustín García & Julián Ramajo, 2005. "Fiscal policy and private consumption behaviour: The Spanish case," Empirical Economics, Springer, vol. 30(1), pages 115-135, January.
  6. Evans, Paul, 1993. "Consumers Are Not Ricardian: Evidence from Nineteen Countries," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 534-48, October.
  7. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  8. Rasmus Pikkani, 2000. "The monetary sector under a currency board arrangement : specification and estimation of a model with Estonian data," Bank of Estonia Working Papers 2000-4, Bank of Estonia, revised 13 Oct 2000.
  9. Fumio Hayashi, 1982. "The Effect of Liquidity Constraints on Consumption: Cross-Sectional Analysis," Discussion Papers 516, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Becker, Torbjörn, 1995. "Government Debt and Private Consumption: Theory and Evidence," SSE/EFI Working Paper Series in Economics and Finance 71, Stockholm School of Economics.
  11. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
  12. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  13. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
  14. Haque, Nadeem U & Montiel, Peter, 1989. "Consumption in Developing Countries: Tests for Liquidity Constraintsand Finite Horizons," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 408-15, August.
  15. Robert J. Barro, 1996. "Reflections on Ricardian Equivalence," NBER Working Papers 5502, National Bureau of Economic Research, Inc.
  16. Haug, Alfred A, 1996. "Blanchard's Model of Consumption: An Empirical Study," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(2), pages 169-77, April.
  17. Reginald Darius, 2001. "Debt neutrality: theory and evidence from developing countries," Applied Economics, Taylor & Francis Journals, vol. 33(1), pages 49-58.
  18. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
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