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Are Increases in Government Spending Neutral? Evidence from Latin-American Households

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  • Jose Angelo Divino
  • Luis Felipe Vital Nunes Pereira

Abstract

Using a dynamic optimization model, Ricardian Equivalence (RE) is empirically tested for Argentina, Brazil, Chile and Mexico. The system of equations obtained in the theoretical model is solved using Generalized Method of Moments and Full Information Maximum Likelihood. Results indicate that the null hypothesis concerning RE cannot be rejected for Argentina, Brazil, and Chile but is strongly rejected for Mexico. Therefore, when the fiscal authority seeks to stimulate economic activity by means of tax reductions and increases in government spending, the outstanding effect might be only a rise in private savings for the first three countries.

Suggested Citation

  • Jose Angelo Divino & Luis Felipe Vital Nunes Pereira, 2013. "Are Increases in Government Spending Neutral? Evidence from Latin-American Households," Journal of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 101-120, May.
    • Handle: RePEc:taf:recsxx:v:16:y:2013:i:1:p:101-120
    DOI: 10.1016/S1514-0326(13)60005-7
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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