Ricardian equivalence: Empirical evidence from developing economies

Abstract

The strong underlying assumptions of the Barro/Ricardo equivalence proposition (REP) raise doubts on its validity especially for developing countries. This paper attempts to analyze the validity of the REP and the sources of deviation from REP for a large sample of developing countries. Although the results are of a mixed nature, they suggest that the presence of liquidity-constrained individuals may be the source of deviation from the REP. The analysis also indicates that public spending is a poor substitute for private consumption and hence implies that temporary increases in public spending may have some expansionary effect on aggregate demand.