The Relationship between Public and Private Saving in Spain: Does Ricardian Equivalence Hold?
37 Pages Posted: 10 Oct 2009
Date Written: October 9, 2009
This paper aims to test the validity of the Ricardian proposition for the Spanish economy from three different approaches: a) by testing its theoretical implications on the stability of national saving and the relationship between fiscal and current account balances, b) by carrying a number of tests on different structural consumption equations and, c) by testing this hypothesis in consumption functions stemming from the Euler equations derived from a consumer’s maximization problem. Our results lean toward rejection of the Ricardian proposition, although some degree of substitution between public and private saving is detected. In terms of policy implications, these results would suggest that there is some room for fiscal policy to exert its countercyclical role in the case of Spain. However, the effectiveness of such a policy might be limited in a context of rising debt ratios that trigger sustainability concerns and make consumers increasingly Ricardian.
Keywords: Ricardian equivalence, debt neutrality, saving, fiscal policy
JEL Classification: E62, E21, H30
Suggested Citation: Suggested Citation
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