Working Paper: NBER ID: w2258
Authors: Leonardo Leiderman; Assaf Razin
Abstract: The purpose of this paper is to develop and estimate a stochastic-intertemporal model of consumption behavior and to use it for testing a version of the Ricardian-equivalence proposition with time series data. Two channels that may give rise to deviations from this proposition are specified: Finite horizons and liquidity constraints. In addition, the model incorporates explicitly the roles of taxes, substitution between public , and private consumption, and different degrees of consumer goods' durability. The evidence, based on data for Israel in the first half of the 1980s, supports the Ricardian neutrality specification, yielding plausible estimates for the behavioral parameters of the aggregate consumption function.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government budget variables (H61) | private consumption (D19) |
| finite horizons (D52) | deviations from Ricardian neutrality (F11) |
| liquidity constraints (E41) | deviations from Ricardian neutrality (F11) |
| survival probability parameter (C41) | Ricardian neutrality (F11) |
| fraction of liquidity-constrained consumers (D12) | Ricardian equivalence (H31) |