Ricardian Equivalence: Evidence From South American Countries

Abstract

This study deals with the intergenerational effect of national debt.  We try to find out whether the government deficit incurred today has any adverse effect on the generations to come.  More specifically, this study tests the notion that any deficit acquired by the government today is offset by the private sector by reducing their consumption and increasing their savings to pay for the debt some times in the future.  Since the time horizon for the government is longer than that of the private agents, the private agents altruistically bequeath what they have saved along with interest earned to their offsprings.  This study empirically verifies the debt neutrality hypothesis for several South American countries for which workable data were available.  The results do not support the debt neutrality hypothesis and show that economic agents consider government bonds net wealth affecting their consumption in a positive way.