Ricardian Equivalence revisited: introductory notes

ABSTRACT These notes aim to revisit the debate, the model, the results, and main objections to the validity of the Ricardian Equivalence Theorem as presented in Barro (1974). It is intended to explore his thesis that tax and debt are equivalent and have no real effect on perceived wealth, demand, the real interest rate or on the economy. The thesis refers to the analysis of the ways of financing debt at a given level of government expenditure and does not address the effects of an expansion of this volume of spending, nor it specifically analyzes the effects of an increase in public debt due to a tax reduction policy. After this presentation, the thesis is debated, consolidating some of the premises that are necessary to validate it. The purpose of the paper is to explore the first round of debates on the theme, explaining the restrictions to which the Barro-Ricardo Theorem or the Ricardian Equivalence Theorem is subject, based on the publications by Barro (1976), Buchanan (1976) and Feldstein (1976), all of them within the ‘realm’ of economic orthodoxy. The final section presents some remarks and an analysis of Barro’s later work (1989 and 1996).

Dynamics of Twin Deficits, Ricardian Equivalence, and Feldstein-Horioka Puzzle in South Asian Countries

This study examines the relationship between budget deficit and current account deficit, specifically twin deficits hypothesis, Ricardian equivalence hypothesis, and Feldstein-Horioka puzzle in South Asian countries. Results show that budget deficit and private savings investment balance do not affect current account deficit in the long run and rejects the Keynesian view of twin deficits hypothesis in South Asian countries. No causality exists between current account deficit and budget deficit in India, Pakistan, and Sri Lanka in short run, while bidirectional causality exists in Bangladesh. Ricardian equivalence hypothesis is rejected in Bangladesh and Sri Lanka, while it holds in India and Pakistan. Feldstein-Horioka puzzle exists in Bangladesh and Sri Lanka, while it does not exist in India and Pakistan. Structural reforms in fiscal and trade sector are required to avoid emergence of twin deficits, while an active and effective role of government is required for sustainable economic growth.

Complexity in Stabilization Policies

This chapter briefly revisits the book’s discussions of Keynes, the Great Depresssion, and Stabilization policies. It considers the importance of fiscal policy and the importance of simplicity in its use and the trust in its impact, especially in the 1960s. The chapter then looks at stagflation and growing doubts in the 1970s and the growing importance of rational expectations and of the Ricardian Equivalence Hypothesis and their impact on stabilization policy. Monetary policy also took on increasing importance in light of the growing complexity of the structure of the economy and the consequent growth of many new occupations. Finally, the impact of these changes and of growing globalization on the design of stabilization policies is discussed alongside a possible reduction in the effectiveness of fiscal policy.

Testing the Ricardian Equivalence Theorem: Time Series Evidence from Turkey

Two of the most common measures adopted by the government to stimulate the economy are increasing government borrowings and implementing tax cuts. These tax cuts are financed through increased debt. According to the Ricardian equivalence theory, the consumers will not change their current spending when they anticipate a tax increase in the future. In order to pay high taxes in the future, the government should increase its present savings. However, the extent of applicability of Ricardian equivalence could vary across nations. In this context, the present study explores the long-running relationship between domestic borrowing and private savings in Turkey. For this purpose, the researcher collected the data for key variables, gross domestic savings, and government debt, for the period of 1980–2017. The researcher used unit root, cointegration, VECM, and the Granger causality test to examine the relationships among the variables. Apart from this, ARDL regression was used in order to examine the long-term relationships among the variables. The empirical results indicate that there is presence of bidirectional causality, indicating that Ricardian equivalence is applicable in the economy. Households display a rational behavior by increasing their savings during the periods in which high government expenditure is incurred.

Analisis Ricardian Equivalence Hypothesis di Indonesia: Pengaruh Kebijakan Fiskal terhadap Konsumsi Masyarakat

Belanja pemerintah pusat cenderung mengalami peningkatan dari tahun ke tahun. Jumlah penerimaan pajak yang lebih kecil daripada kebutuhan belanja mendorong pemerintah untuk memperoleh sumber pembiayaan, yang salah satunya dengan melakukan penarikan utang luar negeri. Beban utang luar negeri yang semakin tahun semakin meningkat bisa mempengaruhi perekonomian Indonesia. Penelitian ini bertujuan untuk menganalisis pengaruh kebijakan fiskal dan utang luar negeri pemerintah terhadap konsumsi masyarakat. Penelitian ini juga menggunakan Produk Domestik Bruto (PDB) dan kekayaan sebagai faktor yang mempengaruhi konsumsi. Data yang digunakan di dalam penelitian merupakan data sekunder yang diperoleh dari Kementerian Keuangan, Badan Pusat Statistik dan World Bank tahun 1973 sampai dengan 2014. Metode analisis yang digunakan adalah Error Correction Model (ECM). Hasil penelitian menunjukkan bahwa variabel kebijakan fiskal melalui instrumen belanja pemerintah pusat dan pembayaran bunga utang tidak signifikan mempengaruhi konsumsi dalam jangka pendek. Namun dalam panjang, seluruh variabel independen yang digunakan di dalam penelitian terbukti secara statistik berpengaruh signifikan terhadap konsumsi masyarakat. Ricardian Equivalence Hypothesis tentang adanya netralitas kebijakan fiskal tidak berlaku di dalam perekonomian Indonesia untuk periode 1973 hingga 2014.

Dynamic Scoring: An Assessment of Fiscal Closing Assumptions

Analysis of fiscal policy changes using general equilibrium models with forward-looking agents typically requires a counterfactual adjustment to some fiscal instrument in order to achieve the debt sustainability implied by the government’s intertemporal budget constraint. The choice of fiscal instrument can induce economic behavior unrelated to the policy change in models where Ricardian Equivalence does not hold. In this article, we use an overlapping generations framework to examine the effects of alternative fiscal closing assumptions on projected changes to economic aggregates following a change in tax policy, assessing the extent to which the bias associated with a particular fiscal instrument can be mitigated. While we find quantitative differences in projected macroeconomic activity across alternative fiscal instruments, these differences tend to shrink as the closing date is delayed. Ultimately, the choice of fiscal instrument becomes relatively unimportant if fiscal closing can be delayed sufficiently into the future.

Testing the Ricardian equivalence hypothesis in the case of Ethiopia: An autoregressive-distributed lag approach

The Ricardian equivalence hypothesis (REH) suggests that when the government attempts to stimulate the economy by raising debt-financed government spending, consumption and demand do not increase but rather remain the same. The objective of this study is to test the existence of the REH in Ethiopia, using annual data from 1990 to 2011 and by employing the autoregressive-distributed lag cointegration approach. The study includes three variables (budget deficit, government consumption expenditure, and government debt) which contribute to the REH along with another variable. The results show that only the budget deficit and government consumption expenditure fulfil the REH. However, government debt fails to fulfil it. Thus, limited evidence of the existence of the REH is found in Ethiopia.