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Euler testing Ricardo and Barro in the EU

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Author Info
António Afonso () (ECB and ISEG/UTL)

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Abstract

According to Keynesian economics wisdom, government debt has an effect on the economy since consumers see government debt as net wealth. However, according to the debt neutrality hypothesis of Ricardo (1817), popularised by Barro (1974), such effects would be absent. This paper’s results, obtained from Euler equation estimations using a panel data approach, indicate that it would be wise to reject the debt neutrality hypothesis for the EU and that higher government indebtedness could actually deter private consumption.

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File URL: http://economicsbulletin.vanderbilt.edu/2008/volume5/EB-07E60010A.pdf
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Publisher Info
Article provided by Economics Bulletin in its journal Economics Bulletin.

Volume (Year): 5 (2008)
Issue (Month): 16 ()
Pages: 1-14
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ebl:ecbull:v:5:y:2008:i:16:p:1-14

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Related research
Keywords: debt neutrality; EU; panel data; private consumption;

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H6 - Public Economics - - National Budget, Deficit, and Debt

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier. [Downloadable!] (restricted)
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  2. Dalamagas, Basil A, 1992. "How Rival Are the Ricardian Equivalence Proposition and the Fiscal Policy Potency View?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(4), pages 457-76, November.
  3. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20. [Downloadable!] (restricted)
  4. Phelps, Edmund S, 1982. "Cracks on the Demand Side: A Year of Crisis in Theoretical Macroeconomics," American Economic Review, American Economic Association, vol. 72(2), pages 378-81, May. [Downloadable!] (restricted)
  5. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March. [Downloadable!] (restricted)
  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  8. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  9. Rockerbie, Duane W, 1997. "Are Consumers Ricardian When Some Are Liquidity Constrained? Evidence for the United States," Applied Economics, Taylor and Francis Journals, vol. 29(6), pages 821-27, June. [Downloadable!] (restricted)
  10. J. Humberto Lopez & K. Schmidt-Hebbel & Luis Servén, 2000. "How Effective is Fiscal Policy in Raising National Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 226-238, May. [Downloadable!] (restricted)
  11. Martin Feldstein, 1982. "Government Deficits and Aggregate Demand," NBER Working Papers 0435, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Carmichael, Jeffrey, 1982. "On Barro's Theorem of Debt Neutrality: The Irrelevance of Net Wealth," American Economic Review, American Economic Association, vol. 72(1), pages 202-13, March.
  13. Leiderman, Leonardo & Razin, Assaf, 1988. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 1-21, February. [Downloadable!] (restricted)
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  14. Gupta, Kanhaya L, 1992. "Ricardian Equivalence and Crowding Out in Asia," Applied Economics, Taylor and Francis Journals, vol. 24(1), pages 19-25, January.
  15. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  16. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October. [Downloadable!] (restricted)
  17. Khalid, Ahmed M., 1996. "Ricardian equivalence: Empirical evidence from developing economies," Journal of Development Economics, Elsevier, vol. 51(2), pages 413-432, December. [Downloadable!] (restricted)
  18. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 983-1004, October. [Downloadable!] (restricted)
  19. Himarios, Daniel, 1995. "Euler equation tests of Ricardian equivalence," Economics Letters, Elsevier, vol. 48(2), pages 165-171, May. [Downloadable!] (restricted)
  20. George A. Akerlof, 2007. "The Missing Motivation in Macroeconomics," American Economic Review, American Economic Association, vol. 97(1), pages 5-36, March. [Downloadable!]
  21. Aschauer, David Alan, 1988. "The Equilibrium Approach to Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 41-62, February. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ricardo M. Sousa & António Afonso, 2008. "The Macroeconomic Effects of Fiscal Policy," NIPE Working Papers 22/2008, NIPE - Universidade do Minho. [Downloadable!]
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