Empirical Test for Ricardian Equivalence

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Economics | Social and Behavioral Sciences


John Olson, Economics


The contemporary debate pertaining to the effects of government debt on an economy has resulted in two different conclusions in the research field of economics. The generally accepted view pertaining to the effects of fiscal policy is the Keynesian position. However, the Keynesian school of thought has not been able to fully discredit the alternative view, Ricardian equivalence. The previous debate is nested in the fact that economic theory and empirical results obfuscate the consequences of government debt on an economy. This paper builds on the work of Roger C. Kormendi, who found evidence of Ricardian equivalence in the U.S. economy for the time period 1929 to 1976. The paper updates and extends Kormendi’s data definitions to determine if Ricardian equivalence still exists in the U.S. economy. Evidence is found that Ricardian equivalence may have existed prior to 1976. The data extension reveals that the Keynesian position is the most accurate model for the effects of government debt on private consumption for the U.S. economy.