Euler Testing Ricardo and Barro in the EU
University of Lisbon - School of Economics and Management; UECE (Research Unit on Complexity and Economics)
Economics Bulletin, Vol. 5, No. 16, pp. 1-14, 2008
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.
Keywords: debt neutrality, private consumption, EU, panel data
JEL Classification: C23, E21, E62, H63
Date posted: April 9, 2008