The Validity of Ricardian Equivalence Hypothesis. A comparative Analysis for high and low government debt European countries”

Having theoretically approached the Ricardian Equivalence Hypothesis analyzing the underlying assumptions and the proposed estimation approaches and having reviewed the relative existing literature we used the long run consumption function developed by Berben and Brosens (2007) in order to investigate the impact of government debt on private consumption and hence test the Ricardian Equivalence proposition for different levels of debt. In our analysis we studied both the long run and short run effects of public debt (incorporating the consumption function in an ADRL model). According to our main results the Ricardian Equivalence Hypothesis was rejected both for the high and low indebted countries since the government debt coefficient was positive and statistically significant though less potent for the high debt countries. On the contrary, the short run effects results revealed that individuals especially in high debt countries obtain Ricardian characteristics.