Assessing Ricardian Equivalence for the New Member States: Does Debt-Neutrality Matter?
Posted: 1 Sep 2008
Using a structural model based on dynamic optimizing agents, we empirically test the Ricardian Equivalence Proposition (REP) for eleven New EU-Member States (NMS). We extend the basic model by including the government budget constraint, thus being able to evaluate whether individuals take the evolution of public debt into account. In the basic setting we cannot reject the validity of the REP for four NMS, in the extended model the relevance of the REP changes for six countries, implying that the development of government debt and long-term sustainability of public finances matters with regard to the validity of the REP.
Keywords: Ricardian equivalence, infinite horizons, liquidity constraints, government budget constraint, fiscal policy
JEL Classification: C32, E21, E62
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