Ricardian Equivalence: Some Macro-econometric Tests forPakistan

Publication Year : 1992

The Ricardian Equivalence Hypothesis (REH) since resurrectedby Barro (1974) states that deficit fmancing and taxation produce thesame intertemporal allocation of consumption. To establish his theorem,Barro has to make a number of restrictive assumptions such as: allgovernment revenue is collected by lump-sum taxation, debt is believedto be eventually repaid, capital markets are perfect, there is nouncertainty and agents are ‘effectively’ infinite-lived. To motivate thelast assumption, Barro shows that because of purely altruistic motives,the agents derive utility from the welfare of their children and theirgrandchildren and so on such that through the inter-generationaltransfers, they act virtually like the infinitely lived. With thepublication of Barro’s seminal paper, a flood of theoretical andempirical literature on Ricardian Equivalence has emerged whiCh waspublished mostly in the 1970s and 1980s. A complete review of theliterature is not possible. However, it must be pointed out that not asingle study to the author’s knowledge, has appeared dealing withdeveloping countries. Kochin (1974); Aschauer (1985); Kormendi (1983);Leiderman and Razin (1988) have produced empirical support for theRicardian Equivalence Hypothesis using data on USA, Canada and otherdeveloped countries. On the other hand, Buchanan (1986); Brennen (1987);Modigliani, Jappali and Pagano (1985); Feldstein (1976); Feldstein andElmendorf (1987); Haque (1988); Buiter and Tobin (1980); Poterba andSummers (1988) produce evidence which is generally inconsistent with thebasic logic of the Ricardian Equivalence Hypothesis. The overall reviewsof the debate are presented in Bernheim (1987); Boskin, Flamming andGorini (1987); Bernheim (1989) and Leiderman and Blajer (1988), whichgenerally come to the conclusion contradicting the fmdings of theRicardian Equivalence Hypothesis. A comprehensive review of REHliterature is given in Kazmi (1991).

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