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Asymmetry Effect of Tax and Public Debt on Private Consumption Spending in Russia

Author

Listed:
  • Dhyani Mehta
  • Valentina V. Derbeneva

Abstract

According to the Ricardian Equivalence theory, private consumption spending is unaffected by the debt vs tax mode of deficit financing. The study re-examines the “Ricardian Equivalence” hypothesis in Russia by using private consumption spending as the dependent variable and government expenditure, government borrowing, tax, and income as the independent variables. The Ricardian position offers an intriguing issue in the Russian setting. If the Russian economy exhibits Ricardian equivalence, the private sector will shift its spending habits and boost its savings, rendering the policy reforms ineffectual. The ARDL and NARDL models used yearly time series data between 1988 and 2022. The results refute the Ricardian Equivalence and support the Keynesian perspective that financing the fiscal deficit (debt vs tax) does affect private consumption spending. The estimates support a strong long-run and short-run link between the variables. Estimates confirm that tax and borrowing mode of deficit financing negatively influences Russia’s consumption spending. It shows that short-run disequilibrium converges to long-run equilibrium in the ARDL model at a rate of 85.3% and in the NARDL model at a rate of 28.6%. The study concludes that the deficit financing strategy should be carefully devised and supported. Implementing an expansionary fiscal policy will influence the overall private demand of Russia. A tendency to rely too much on tax and borrowings as a financing technique negatively influences private consumption spending. This study contributes to the pool of literature on “Ricardian Equivalence” and deficit financing by providing new data on how to formulate fiscal policies that are efficient at financing deficits and sustainable by making prudent expenditures without endangering the nation’s private consumption.

Suggested Citation

  • Dhyani Mehta & Valentina V. Derbeneva, 2023. "Asymmetry Effect of Tax and Public Debt on Private Consumption Spending in Russia," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 9(3), pages 359-375.
  • Handle: RePEc:aiy:jnljtr:v:9:y:2023:i:3:p:359-375
    DOI: https://doi.org/10.15826/jtr.2023.9.3.147
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    References listed on IDEAS

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    1. Cosimo Magazzino, 2017. "Twin Deficits or Ricardian Equivalence? Empirical Evidence in the APEC Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 7(10), pages 959-971.
    2. Cosimo Magazzino, 2017. "Twin Deficits or Ricardian Equivalence? Empirical Evidence in the APEC Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 7(10), pages 959-971, October.
    3. Willem H. Buiter & James Tobin, 1978. "Debt Neutrality: A Brief Review of Doctrine and Evidence," Cowles Foundation Discussion Papers 497, Cowles Foundation for Research in Economics, Yale University.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    ARDL; NARDL; consumption spending; deficit financing; Ricardian equivalence; government borrowing; fiscal policy; fiscal deficit; Russia;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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