Saving and the relevant Ricardian equivalence theorem

The modern Ricardian equivalence theorem focuses on the intertemporal equivalence between taxation and bond financing of government expenditures that David Ricardo considered practically irrelevant, rather than their contemporaneous equivalence in terms of the opportunity cost of government spending. Relying upon the implausible assumption of each individual’s future tax-capitalization behavior that Ricardo explicitly rejected, the modern Ricardian equivalence theorem reaches the exact opposite conclusions about government deficit spending than Ricardo argued. This paper explains these fundamental problems with the modern Ricardian equivalence proposition and shows an alternative method of arguing Robert Barro’s original point about the inefficacy of Keynesian deficit spending.

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New evidence on the Ricardian equivalence theorem: a multicointegration approach

Applied Economics ◽

10.1080/000368496328443 ◽

1996 ◽

Vol 28 (6) ◽

pp. 695-704 ◽

Cited By ~ 11

Author(s):

Lori L. Leachman

Keyword(s):

Equivalence Theorem ◽

Ricardian Equivalence ◽

New Evidence

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Does the Ricardian Equivalence Theorem Capture the Consumption Behavior of Maltese Households?

International Journal of Economics and Finance ◽

10.5539/ijef.v10n12p77 ◽

2018 ◽

Vol 10 (12) ◽

pp. 77

Author(s):

Ian P. Cassar ◽

Kurt Davison ◽

Christian Xuereb

Keyword(s):

Open Economy ◽

Public Debt ◽

Private Consumption ◽

Household Consumption ◽

Equivalence Theorem ◽

Future Generations ◽

Consumption Pattern ◽

Ricardian Equivalence ◽

Consumption Behavior ◽

High Level

This paper explores the relationship between government debt and private consumption for Malta. In particular, it attempts to find evidence in favor or against the proposition that the consumption behavior of Maltese households follows the Ricardian Equivalence Theorem. The empirical findings from this analysis suggest that household consumption behavior in Malta is not Ricardian. The resulting lack of evidence supporting the presence of a cointegrating relationship between private consumption and public debt indicates that there is no long run relationship amongst these two variables. However, the results obtained from a subsequent application of a vector auto regressive generalized impulse response function suggests that in the short-term a rise in public debt does positively influence private household consumption. This implies that Keynesian theory may be better suited at explaining the underlying behavior of Maltese households in response to changes in the level of public debt, supporting the view that Maltese households, on aggregate, exhibit a myopic behavior with regards to household consumption patterns. This suggests that to an extent, the Government may thus be able to take advantage of the implicit effectiveness of an expansionary fiscal stance to stimulate the economy through higher aggregate consumption, at least in the short run. However, it should be noted that in the case of Malta the non-presence of the Ricardian Equivalence Theorem may not necessarily imply a high level of effectiveness of Keynesian fiscal policy, given that Malta is a small and open economy characterized by a high level of import content in its aggregate demand components. The longer-term implications pertaining to the public debt burden on future generations should be taken into account by policy makers as higher levels of debt could result in an eventual contractionary fiscal stance, which would negatively impact the consumption pattern of future generations.

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Testing the Ricardian Equivalence Theorem: Time Series Evidence from Turkey

Economies ◽

10.3390/economies8030069 ◽

2020 ◽

Vol 8 (3) ◽

pp. 69

Author(s):

Ahmet Salih İkiz

Keyword(s):

Government Expenditure ◽

Equivalence Theorem ◽

Ricardian Equivalence ◽

Causality Test ◽

The Future ◽

Domestic Savings ◽

High Government ◽

Private Savings ◽

The Government ◽

Tax Cuts

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.

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