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We are living on the cost of our children

  • Waqas, Muhamad
  • Awan, Masood Sarwar
  • Aslam, Muhammad Amir

The strict assumptions of Ricardian Equivalence Hypothesis hoist the debates on this issue among different school of thoughts. Its validity entails certain assumptions which raise the doubts on its validity especially in the context of developing countries like Pakistan. The aim of this study is to check the validity of Ricardian Equivalence Hypothesis and its sources of deviation in case of Pakistan. The study use annual data for the period of 1973-2009. Engle and Granger and Johansen cointegration approaches depicts the long run relationship among variables. Generalized Method of Moment results shows that the presence of liquidity constraints and infinite horizons are the sources of failure of Ricardian Equivalence Hypothesis. These findings illustrate concentration towards the importance of fiscal policies in raising private consumption and controlling budget deficits, which are the prime goals of stabilization policies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32044.

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Date of creation: 2011
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Publication status: Published in Interdisciplinary Journal of Contemporary Research in Business 2.3(2011): pp. 607-623
Handle: RePEc:pra:mprapa:32044
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