Ricardian Equivalence, Liquidity Constraints, and the Yaari-Blanchard Effect: Tests for Developing Countries
19 Pages Posted: 15 Feb 2006
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: Suggested Citation