Testing Ricardian equivalence: a reconsideration

Empirical evidence on the determinants of private consumption in 52 countries over the period 1979–88 indicates that, in contrast to the Ricardian equivalence proposition, a significant relationship exists between consumption and the variable (the ratio of tax revenue to changes in government debt) which measures the extent of substituting debt for tax financing. The results obtained from estimating Euler equations for the representative individual's stochastic dynamic optimization problem are favourable to the proposition that the choice between current taxation and debt issuance to finance a given government expenditure stream is relevant to the determination of the level of aggregate demand.