Introduction[ edit ] Governments can finance their expenditures by creating new money, by levying taxes, or by issuing bonds. Since bonds are loans, they must eventually be repaid—presumably by raising taxes in the future. The choice is therefore "tax now or tax later. According to the hypothesis, taxpayers will anticipate that they will have to pay higher taxes in future. As a result, they will save, rather than spend, the extra disposable income from the initial tax cut, leaving demand and output unchanged. David Ricardo was the first to propose this possibility in the early nineteenth century; however, he was unconvinced of its empirical relevance.

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Malakus However, Ricardo himself doubted that this proposition had practical consequences. When testing Ricardian equivalence, however, eqkivalence use of these variables is almost meaningless.

Even though a world- wide diffusion of the effects of country-specific economic policies through external trade cannot be seriously doubted, the present VAR model is quite naive to capture the complicated set of these intricate inter- country relationships. He followed up the initial exposition with a claim that individuals do not actually evaluate taxes in such a manner and, in particular, take myopic view of the tax rocardienne.

Debt, deficits and finite horizons. Liste des illustrations Table 1. The first is an ad hoc approach, in which a structural consumption function is estimated, that relates the level of consumption expenditure to a set of relevant exogenous variables including government outlays, taxes and public debt. InRobert J. Ricardian equivalence has been the subject of extensive empirical inquiry. Thus, pooling time-series and cross-section data emerges as a most sensible procedure, provided that sufficient allowance is made for obvious differences among the sample countries, on the basis of both the debt ratio and per capita income.

The first step, ricardoenne transforming all the variables to achieve stationarity, is to determine the own lag length for consumption. In particular, the equivalence theorem is compared critically to the traditional position ooof visualizing the effects of tax increases on private consumption as completely different from those of bond issuance, at a given level of government expenditure. If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item.

BERMABRU CATALOGUE PDF The first dummy takes a value of 1 for solvent, high-income countries and zero for the remaining countries ; the second takes a unit value for debt-ridden, high-income countries and zero otherwise ; the third is assigned unit values for intermediate, high-income countries ; the fourth separates, in a similar fashion, the solvent, low-income countries from the rest and the fifth designates the debt-ridden, low-income countries.

Classification of the countries into groups according to the level of indebtedness and the level of income [link] Table 2. The relationship derived from the solution of 5 in terms of private consumption may be viewed as the intertemporal budget constraint of the private sector, that holds under the assumption that individuals internalize the budget constraint of the public sector.

In sum, most previous studies appear to pay no attention to the fact that it is changes in the ratio of taxes to budget deficit that must be looked upon for detecting negligible Ricardian theorem or remarkable traditional view effects on private spending, as only such changes can capture the crucial link of substituting debt for tax financing. Our results suggest that the REH applies to Moroccan economy, since private saving compensates a big fraction i.

Ricardian equivalence In empirical studies of aggregate consumption, two approaches are usually employed. Barro, Robert J, In all other cases, it is shown that tax increases have significantly adverse effects on consumer spending. Our purpose is to find out whether consumption in sensitivity is best approximated by a Ricardian regime, where fiscal policy is inefficient in steering demand or, instead, by a Keynesian regime, where fiscal policy plays a dominant role.

Even less conclusive is the reaction pattern of households with respect to changes in the tax burden. This page was last edited on 18 Decemberat A conceptual explanation for the additional classification according to per capita income may be given by the significant portion of the population in equivalehce countries that is equivvalence affected by liquidity constraints.

This finding is consistent with the intuitive conviction that households cannot ricardifnne unaware of the constraints that bind government actions, in periods of rising concern about the sustainability of fiscal deficits.

The Journal of Political Economy. In this story, if these processes can be changed by the government, or, in any way, the additional income can be believed not to be withdrawn later, the initial tax cut will induce a rise in public consumption expenditures.

The solution of 8 in terms of C provides an approximation to the Euler equation for consumption. Governments can finance their expenditures by creating new money, by, levying taxes, or by issuing bonds. Brookings Papers on Economic Activity. In these countries, the substitution of debt for taxes, at a given stream of government spending, has a tendency to reduce consumption expenditure, so that public deficits appear to be more than offset by increased private savings.

In order to exploit the full rquivalence of the time-series, cross-section data, we employed the between-within groups ricarrdienne effects estimator. As Mundlak [] has shown, this estimator amounts to applying ordinary least squares to 9expressed in terms of transformed variables.

Rivardienne behaviour in debt-ridden countries contrasts sharply with that in solvent countries. This happens especially in cases where:. It also allows you to accept potential citations to this item that we are uncertain about. The Ricardian view of equivalence between debt and tax financing is tested in the context of a pooled cross-section, time-series macroeconomic model for 49 countries. Barri Zain Al-abdeen, A transformed variable is defined as the original variable minus the country and time means plus the total mean.

This is so because the main interest focuses on the implications of a policy, under which fiscal ticardienne cut taxes and issue bonds of equal value in the first period, while raising taxes in the second period to repay the debt. In empirically testing the validity ricadienne the traditional view vis-a-vis Ricardian equivalence, researchers rely heavily on the sign and statistical significance of the coefficients on a number of fiscal variables, each of them considered independently: The consideration of dissimilarities in debt ratio and living standards implies that a decision should be reached on which group of countries is likely to differ from the others, in the process of testing REH.

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