Ricardian Equivalence, Liquidity Constraints, and the Yaari-Blanchard Effect: Tests for Developing Countries

19 Pages Posted: 15 Feb 2006

See all articles by Nadeem Ul Haque

Nadeem Ul Haque

Pakistan Institute of Development Economics

Peter J. Montiel

Williams College - Department of Economics

Date Written: December 18, 1987

Abstract

Adjustment programs in developing countries have emphasized the importance of reducing fiscal deficits in order to improve private sector saving and investment performance. Recent theoretical analyses associated with the Ricardian equivalence proposition, however, suggest that, in the limit, changes in the level of public sector savings may be completely offset by a change in private savings. This offset would occur because changes in the level of government savings imply changes in the level of future taxation, which in turn affects current private sector saving. Empirical tests of the model for a sample of developing economies do not support the equivalence proposition owing to the prevalence of liquidity constraints.

JEL Classification: 121, 321, 921

Suggested Citation

Ul Haque, Nadeem and Montiel, Peter J., Ricardian Equivalence, Liquidity Constraints, and the Yaari-Blanchard Effect: Tests for Developing Countries (December 18, 1987). IMF Working Paper No. 87/85, Available at SSRN: https://ssrn.com/abstract=885023

Nadeem Ul Haque (Contact Author)

Pakistan Institute of Development Economics ( email )

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Islamabad, Capital 44000
Pakistan
+92-51-9217879 (Phone)
+92-51-9210886 (Fax)

HOME PAGE: http://www.saneinetwork.net/structure/st_comm/NadeemUlHaque.asp

Peter J. Montiel

Williams College - Department of Economics ( email )

Fernald House
Office: Fernald 14
Williamstown, MA 01267
United States
413-597-2103 (Phone)
413-597-4045 (Fax)

HOME PAGE: http://www.williams.edu/Economics/faculty/montiel.htm

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