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Testing Ricardian Neutrality with an Intertemporal Stochastic Model


  • Leonardo Leiderman
  • Assaf Razin


The purpose of this paper is to develop and estimate a stochastic-intertemporal model of consumption behavior and to use it for testing a version of the Ricardian-equivalence proposition with time series data. Two channels that may give rise to deviations from this proposition are specified: Finite horizons and liquidity constraints. In addition, the model incorporates explicitly the roles of taxes, substitution between public , and private consumption, and different degrees of consumer goods' durability. The evidence, based on data for Israel in the first half of the 1980s, supports the Ricardian neutrality specification, yielding plausible estimates for the behavioral parameters of the aggregate consumption function.

Suggested Citation

  • Leonardo Leiderman & Assaf Razin, 1987. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," NBER Working Papers 2258, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2258
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    References listed on IDEAS

    1. 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 971-987, December.
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    7. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-127, March.
    8. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
    9. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
    10. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
    11. Kochin, Levis A, 1974. "Are Future Taxes Anticipated by Consumers? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 385-394, August.
    12. James M. Poterba & Lawrence H. Summers, 1986. "Finite Lifetimes and the Crowding Out Effects of Budget Deficits," NBER Working Papers 1955, National Bureau of Economic Research, Inc.
    13. 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.
    14. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    15. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-123, March.
    16. Seater, John J, 1982. "Are Future Taxes Discounted?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 376-389, August.
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    Cited by:

    1. 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.
    2. Kenneth Kasa, 1994. "Finite horizons and the twin deficits," Economic Review, Federal Reserve Bank of San Francisco, pages 19-28.
    3. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    4. Razin, Assaf & Sadka, Efraim, 1996. "Fiscal balance during inflation, disinflation, and inmigration: policy lessons," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34296, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Normandin, Michel, 1999. "Budget deficit persistence and the twin deficits hypothesis," Journal of International Economics, Elsevier, vol. 49(1), pages 171-193, October.
    6. repec:ebl:ecbull:v:5:y:2004:i:16:p:1-10 is not listed on IDEAS
    7. Khalid, Ahmed M., 1996. "Ricardian equivalence: Empirical evidence from developing economies," Journal of Development Economics, Elsevier, vol. 51(2), pages 413-432, December.
    8. David Romer, 1988. "What are the Costs of Excessive Deficits?," NBER Chapters,in: NBER Macroeconomics Annual 1988, Volume 3, pages 63-110 National Bureau of Economic Research, Inc.
    9. 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.
    10. Eunji Kim & Yoonhee Ha & Sangheon Kim, 2017. "Public Debt, Corruption and Sustainable Economic Growth," Sustainability, MDPI, Open Access Journal, vol. 9(3), pages 1-30, March.
    11. Aqdas Ali Kazmi, 1994. "Private Consumption, Government Spending, Debt Neutrality: Resolving Kormendi- Feldstein-Modigliani Controversy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 33(4), pages 1055-1071.
    12. Brunila, Anne, 1996. "Fiscal policy and private consumption : Saving decisions : Evidence from Finland," Research Discussion Papers 28/1996, Bank of Finland.
    13. 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.
    14. António Afonso, 2001. "Government indebtedness and european consumers behaviour," Working Papers Department of Economics 2001/12, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    15. António Afonso, 2008. "Euler testing Ricardo and Barro in the EU," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-14.
    16. Kandil, Magda, 2001. "Asymmetry in the effects of us government spending shocks: evidence and implications," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(2), pages 137-165.
    17. repec:ebl:ecbull:v:5:y:2008:i:16:p:1-14 is not listed on IDEAS
    18. Muhammad Waqas & Masood Sarwar Awan, 2012. "Exchange Rate, Interest Rate and Ricardian Equivalence Evidence from Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 0(SS), pages 249-269.

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