Government debt, Consumption, and Interest Rates: An Empirical Study of the Ricardian Equivalence Hypothesis

Abstract

<p>This paper investigates the effects of the government debt on private consumption and interest rates (i.e., the Ricardian equivalence hypothesis) in a nonlinear-quadratic equilibrium framework, combined with a time series analysis of the data. The model is summarized by the restrictions on the coefficients of a vector auto regressive (VAR) representation of the relevant variables. The model is not rejected for the sample period of 1947 through 1979 even though the evidence was not overwhelming. It is rejected when the sample period is. extended, to... include, the. Reagan .administration .period up to 1987,1. A more detailed data analysis based on a VAR implies, however',- that the rejection of the model does not necessarily imply rejection of the equivalence hypothesis for recent years and that the Ricardian equivalence hypothesis still provides a plausible approximation of reality.</p>