What would validity of ricardian equivalence theorem

Reference no: EM13897562

1. Discuss the rationale and validity of the following statements: "It makes no difference whether government expenditures are ?nanced by money or bonds." "A ?scal de?cit has a larger impact on aggregate demand if it is ?nanced by money than if it is ?nanced by bonds."

2. An empirical study tested for the Ricardian equivalence theorem by estimating the following equation:

ΔA_t = a₀ + a₁ΔB_t + μ_t

where A is the public's net real ?nancial assets (excluding its holdings of government bonds), B is real public debt and μ is a random term. Does aˆ1 = 1 con?rm the Ricardian equivalence theorem? US aggregate time series tend to yield aˆ1 = 0. What would this imply for the validity of the Ricardian equivalence theorem?

Formulate and specify at least one other estimation equation for testing the Ricardian equivalence theorem.

Reference no: EM13897562

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