Assessing Ricardian Equivalence for the New Member States: Does Debt-Neutrality Matter?

Posted: 1 Sep 2008

Abstract

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

Suggested Citation

Reitschuler, Gerhard, Assessing Ricardian Equivalence for the New Member States: Does Debt-Neutrality Matter?. Economic Systems, Vol. 32, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=1260849

Gerhard Reitschuler (Contact Author)

University of Innsbruck ( email )

Universit├Ątsstra├če 15
Innsbruck, Innsbruck 6020
Austria

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