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Testing the Ricardian equivalence theorem in the framework of the permanent income hypothesis

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  • Bilgili, Faik

Abstract

According to Ricardian Equivalence Theorem (RET), today's consumption decisions would be independent of some fiscal variables such as lump sum taxes, government debt outstanding or the budget deficit given that government expenditures are fixed. The Permanent Income Hypothesis (PIH) consumption function also implies that change in consumption cannot be forecast by the change in lag(s) of any variable including the change in those fiscal variables. Thus, the test of RET is a nested test of the PIH. After unit root tests and cointegration tests were conducted, the test of the RET were run by using a system in which coefficients of consumption, income, taxes and debt variables were determined in two steps. Among twenty countries that were chosen based on data availability, the result of this paper is that the RET holds in all countries and that the PIH holds in majority of the countries. The failure of the PIH occurs in developing countries.

Suggested Citation

  • Bilgili, Faik, 1997. "Testing the Ricardian equivalence theorem in the framework of the permanent income hypothesis," MPRA Paper 75542, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:75542
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    References listed on IDEAS

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    Cited by:

    1. Terézia Vančová, 2019. "The Excess Smoothness and Sensitivity of Consumption in the V4 Countries," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 67(6), pages 1653-1663.
    2. Bilgili, Faik, 1999. "Yeni Klasik kurama göre bütçe politikalarının değerlendirilmesi [An evaluation of New Classical arguments on budget policies]," MPRA Paper 80771, University Library of Munich, Germany.
    3. Bilgili, Faik, 2006. "Random walk, excess smoothness or excess sensitivity? Evidence from literature and an application for Turkish economy," MPRA Paper 24086, University Library of Munich, Germany, revised 14 Jul 2010.
    4. Ahmet Salih İkiz, 2020. "Testing the Ricardian Equivalence Theorem: Time Series Evidence from Turkey," Economies, MDPI, vol. 8(3), pages 1-20, August.
    5. Bilgili, Faik, 1999. "Türkiye'de bütçe açıklarının makro ekonomik sonuçları [The macroeconomic effects of budget deficits in Turkey]," MPRA Paper 75639, University Library of Munich, Germany.
    6. Faik Bilgili, 2018. "Piyasa Ekonomisine Geçiþ Süreci ve Sonrasýnda Türkiye'de GINI Katsayýlarýnýn Analizi: Alternatif GINI Formülü Yaklaþýmý," Isletme ve Iktisat Calismalari Dergisi, Econjournals, vol. 6(1), pages 36-58.
    7. Faik Bilgili & Hayriye Hilal Ba l ta, 2016. "Testing the Permanent Income and Random Walk Hypotheses for Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1371-1378.
    8. Bilgili, Faik, 2017. "Piyasa ekonomisine geçiş süreci ve sonrasında Türkiye'de GINI katsayılarının analizi: Alternatif GINI formülü yaklaşımı [During and after the process of transition to market economy, an analysis of," MPRA Paper 81043, University Library of Munich, Germany.

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    More about this item

    Keywords

    Ricardian Equivalence; Permanent Income Hypothesis; Rational Expectations; Intertemporal Utility Function; Sensitivity; Unit Root; Cointegration;
    All these keywords.

    JEL classification:

    • B0 - Schools of Economic Thought and Methodology - - General
    • C0 - Mathematical and Quantitative Methods - - General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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