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Does the Ricardian Equivalence Proposition Hold in Less Developed

Countries?

Article  in  International Review of Applied Economics · April 2003

DOI: 10.1080/0269217032000064062 · Source: RePEc

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 DOES THE RICARDIAN EQUIVALENCE PROPOSITION HOLD IN LESS
DEVELOPED COUNTRIES?

Gianluigi Giorgioni* and Ken Holden**

Abstract

The objective of this paper is to assess whether the Ricardian Equivalence Proposition
(REP) holds in developing countries. Prima facie, since the REP requires a number of
assumptions that might not appear to be satisfied in developing countries, it seems that
the REP should not hold.. However, the empirical evidence provided so far is mixed.
In this paper, the validity of the REP will be tested using panel data for ten developing
countries: Burundi, El Salvador, Ethiopia, Honduras, India, Morocco, Nigeria,
Pakistan, Sri Lanka and Zimbabwe. The countries were chosen for the availability of
data and should reflect the various circumstances of low-income countries. Despite
the obvious limitation of the data available and the diversity of the countries, the
results provide some tentative support for the REP for developing countries, at least
warranting further research.

Key words: Ricardian Equivalence, developing countries, panel data

* University of Abertay Dundee, ** Liverpool Business School

School of Social and Health Sciences John Foster Building
Division of Economics 98 Mount Pleasant
Marketgait House Liverpool L3 5UZ
158 Marketgait United Kingdom
Dundee DD1 1HG
United Kingdom

1
1. Introduction

The objective of this paper is to assess whether the Ricardian Equivalence Proposition
(REP) holds in developing countries. The REP requires a number of assumptions, the
most important of which is that consumers are not liquidity (or credit) constrained,
that might not to be satisfied in developing countries and so it seems that the REP
should not hold for these countries. However, the empirical evidence provided so far
is mixed. Dalamagas (1992a, 1992b), Ghatak & Ghatak (1996) and Khalid (1996)
specifically tested the REP for samples of developing countries. Ghatak & Ghatak
(1996) provide evidence to support the hypothesis that the REP does not hold in one
developing country, India. However, Khalid (1996) was not able to reject the REP in
12 out of 17 developing countries included in his sample. Finally, Dalamagas (1992a,
1992b) rejected the REP for a sample of developing and developed economies.
However, when the test separated out the effect of high indebtedness, high debt
countries provided evidence to support the REP. The group of highly indebted
countries mainly comprised developing countries. Therefore, there is the need to re-
assess both the theoretical and empirical analysis of the REP in the context of
developing countries. To achieve these aims, the literature on the REP will be
reviewed by focusing on some aspects of developing countries, while the empirical
validity of the REP will be tested using panel data for ten developing countries:
Burundi, El Salvador, Ethiopia, Honduras, India, Morocco, Nigeria, Pakistan, Sri
Lanka and Zimbabwe. The countries were chosen for the availability of data and
because they should reflect the various circumstances of low-income countries.

The paper is organised as follows. Section 2 will tailor the theoretical foundations of
the Ricardian Equivalence Proposition to the circumstances of developing countries.
The model and the empirical results are reported in Section 3, while the conclusions
are in Section 4.

2. Ricardian Equivalence proposition and developing countries

Since the seminal papers by Barro (1974,1976), much research has attempted to test
the REP. The validity of the REP rests on a number of assumptions: the number of
citizens obliged to pay taxes is constant; capital markets are perfect (in terms of no
liquidity constraints); economic agents are infinite-living, forward-looking and
rational; future income flows and future tax burdens are certain; taxes are non-
distortionary and are collected as a lump-sum per capita.

On the face of it, these pre-requisites might not be met by most developing
countries1and any test of the REP for such countries might be expected to result in
rejection. However, the empirical evidence is mixed and there is a need to reassess the
validity of the assumptions in the context of developing countries.

Given the high rate of growth of the population in most developing countries, the
assumption that the population is constant might not be seen as a realistic one.
However, Becker & Barro (1988) and Zhang (1997) have showed that the relation
between government debt and fertility rate can be a highly complex one and if the
latter is not independent of the former, the REP would hold. Whether the fertility rate

2
is affected by government debt in developing countries is, however, still open to
investigation.

The absence of perfect capital markets in developing countries is probably the most
quoted reason for the REP not to hold (see Haque & Montiel (1989) and Rossi
(1988)). Consumers are expected to be liquidity constrained (credit rationed) and also
governments are assumed to be better at producing liquidity services by borrowing
from the rich (unconstrained consumers, be they locals or foreigners) and lending to
the poor. Although it appears that liquidity constraints of the credit rationing-type do
play a significant role in developing countries, imperfections in the capital markets are
not only confined to developing countries. For instance, Lopez et al., (2000) show that
40% of individuals are liquidity constrained in OECD countries and 60% in
developing countries. Furthermore, the assumed superior ability of government to
provide financial services might be open to discussion. Also, distortions in financial
and credit markets (commonly known as financial repression) might be deliberately
created by governments and are more likely to be common in countries where
governments need to finance large debts (see for instance McKinnon, (1973), Shaw,
(1973), and Gibson & Tsakalatos, (1994)). In such situations, a government might
introduce measures to give priority to its borrowing2. Therefore, increased deficits
would lead to increased imperfections in capital markets, further enhancing the
(positive) effect of government deficits. However, economic agents are not entirely
powerless and might react by resorting, for instance, to capital flight and by
withdrawing from the official monetary and credit channels. Furthermore, the
presence of curb (parallel) lending markets and moneylenders has been highlighted in
many contributions in the area of financial repression3.

Given the nature of the extended family and the extensive inter-generation links, it is
possible to suggest that "infinite-living" economic agents are not impossible to find in
developing economies. Khalid (1996) provides evidence that individuals have
“infinite” lives for a sample of developing countries.

As for forward-looking rational economic agents, the presence of parallel (or black or
curb) markets might suggest that people do react to information, when and if
available.

Another assumption is that future flows of income and taxation are certain and that the
taxation should not be distortionary. In developing economies, the lack of developed
financial markets prevents governments also from issuing bonds. However, the
alternative of raising revenues is equally complex given the widespread presence of
non-official activities, with income tax very difficult to levy and sales or value added
taxes not easy to administer. What is left is a tax on exports of commodities, recourse
to foreign debt directly by the government or indirectly through state owned
enterprises, incurring payments arrears and recourse to printing money. With this in
mind, emphasis should be shifted to the expenditure side.

Seater (1993 page 145-146) observes that:

"…[Ricardian Equivalence Proposition] reflects nothing more than the well-known but often forgotten
fact that the true measure of government's use of resources is government purchases, not any one

3
method employed by the government to lay claim on those resources, even if that method is officially
dubbed taxation."

Whether government purchases crowd out or crowd in private consumption has been
the subject of an on-going debate. Ahmed (1986) found that government consumption
substantially substituted private consumption in the UK. Similarly Dalamagas (1992a,
1992b) arrived at the same conclusion for a large sample of countries including
developing countries. Ni (1995) argues that the results appear to be highly dependent
on the specification of the estimated model, a conclusion supported by Hatzinikolou
(2000) who also found that government consumption was a weak substitute for private
consumption in the USA prior to 1969, but not afterwards when the two aggregates
became independent. However, Karras (1994), Evans & Karras (1996), Khalid (1996)
and Kuehlwein (1998) found that government consumption complemented private
consumption, if had any influence at all.

The theoretical debate and the empirical evidence prompted by the REP so far have
not produced a conclusive verdict on the matter. Also the empirical tests are not
conclusive. Kormendi (1983), Evans (1988), Seater (1993), Kormendi & Meguire
(1996), and Bayoumi & Masson (1998) present evidence in favour of Ricardian
Equivalence. Bernheim (1987), Feldstein & Elmendorf (1990), Modigliani & Sterling
(1990), Graham & Himarios (1996) and Stanley (1998) present evidence against it.
Cadsby & Frank (1991) ran a series of experiments to test Ricardian Equivalence and
found small deviations from it.

Dalamagas (1992a, 1992b), Ghatak & Ghatak (1996) and Khalid (1996) tested the
validity of Ricardian Equivalence for developing countries. Ghatak & Ghatak (1996)
used a Engle-Granger cointegration estimation to show that a tax cut would increase
private consumption in India for the period 1950-1986.

Khalid (1996) tested the validity of REP for a sample of 17 developing countries for
1960-1988 and found mixed evidence in support of it. However, he found that the
assumption that economic agents have infinite time horizons was upheld for every
country, an outcome also supported by Lopez et al., (2000), while lack of liquidity
constraints was supported for at least half of the sample. Khalid (1996, page 428) then
concludes that:

“Thus in general the REP cannot be rejected in 12 out of 17 countries”

Dalamagas (1992a, 1992b) did not specifically test REP for a group of developing
countries, but did it for both developed and developing ones. However, he subdivided
the countries into two groups according to the level of indebtedness. For "solvent"
countries (i.e. countries with low deficit or debt over GDP ratios) REP was not valid
but the empirical evidence for "insolvent" or highly indebted countries supported the
REP. This latter group mainly included developing countries.

4
3. The model and empirical results

Testing the validity of the Ricardian Equivalence Proposition for developing countries
presents various problems. We could have focused on individual countries. However,
this choice has two main drawbacks: data availability for developing countries is
usually confined to annual data and for short periods of time. Furthermore, it is
unlikely that variables such as government deficit and debt vary in a significant way to
influence consumption.

Therefore, we followed the procedure suggested by Bernheim (1987), who argued

there were advantages in measuring the effect of government borrowing upon
consumption through international comparisons, rather than through time series data
for individual countries. The main advantages were to have more observations and
more independent movement of deficits and government spending across countries.
However, he also pointed out that there were important drawbacks such as
compounding mis-measurement of variables, structural differences among countries,
and the possibility that reasons unrelated to Ricardian equivalence could affect some
of the variables (e.g. oil shocks). He then concluded (Bernheim (1987) page 292):

“It is difficult to weigh the relative importance of these advantages and disadvantages a priori. Evidence
from cross-country comparisons is therefore neither definitive nor irrelevant – it simply adds one more
piece to the overall picture”

With the above words of caution in mind, we follow the procedure suggested by
Bernheim (1987), who started by using a fairly standard model of private consumption
such as:

Ct   0  1Yt   2 DEFt   3Gt   4 Dt   5Wt  X t   ut (1)

where C is private consumption (sum of durable and non-durable goods), Y is GDP,

DEF is government deficit, G is government consumption, D is debt, W is wealth and
X represents a vector of variables capturing the socio-economic conditions of the
countries. However, estimating (1) for the countries of our sample (Burundi, El
Salvador, Ethiopia, Honduras, India, Morocco, Nigeria, Pakistan, Sri Lanka and
Zimbabwe) will present various problems, such as the unavailability of data on wealth
and the problems in converting the variables in one common currency.

To solve the above problems, Bernheim (1987, page 294) suggested expressing the
variables relative to GDP to eliminate problems of comparability across countries and
dropping the variable wealth because of its unavailability. Furthermore, Bernheim
(1987) used growth in GDP and growth of population as the socio-economic factors
that might influence variations in the propensities to consume. However, since the
exclusion of these variables does not change the overall conclusions, after testing
equation (2) for consistency with Bernheim (1987), the two variables, growth in GDP
and growth of population, will be dropped. Finally, we modified the original model of
Bernheim, by distinguishing between domestic and foreign debt. The model to be
estimated to test the REP is then:

5
Ct DEFt G DDt FDt
 1   2  3 t  4  5   6YGt   7 PGt  ut (2)
Yt Yt Yt Yt Yt

where C is private consumption, Y is GDP, DEF is government deficit, G is

government consumption, DD is domestic debt, FD is foreign debt, YG is growth in
real GDP, PG is growth in population and u is a disturbance term.
For the REP to be valid 2 = 4 = 5 = 0.

Bernheim (1987) estimated (2) by using averages of the variables to capture the effect
of permanent and transitory variables. However, our approach is different because we
use annual data, rather than averages and we encompass the distinction between
temporary and permanent government consumption by means of the Hodrick-Prescott
filter and of a vector autoregression (VAR) model in levels. As already mentioned
above, unlike Bernheim (1987) we are able to distinguish between domestic and
foreign debt.

It is important to stress that in testing the REP, a variable for private consumption
resulting by the sum of purchases of non-durable goods and the services accruing from
durable goods should be used. But such a variable was simply not available for the
countries of our sample and we had to resort to using a variable inclusive of both
durable and non-durable goods. However, as Vaidyanathan (1993, Table 1 page 597)
has shown, a variable inclusive of purchases of durable goods appears to be more
sensitive to current income than a variable including only services of durable goods.
Since excessive sensitivity to current income goes against REP, if anything this should
introduce a bias against REP4.

As previously mentioned, another weakness of equation (2) is that it fails to

distinguish between temporary and permanent government consumption, while the
two might have different impacts upon private consumption (see Barro (1981) and
Ahmed (1986) on the effect of temporary and permanent government expenditure on
output). With only 25 annual observations (at best) for each country we felt it was
difficult to devise ways of separating temporary from permanent effects. However, we
tried to decompose the time series of the ratio of government consumption and income
by means of the Hodrick-Prescott filter, using the trend as the permanent consumption
and the residuals as transition or surprise expenditure. Also, following Dalamags
(1992a, 1992b), we estimated a VAR model and used the predicted values of
government consumption as the permanent variables and the residuals as the surprise
or temporary effects5. Therefore we tested the following new equations (3) and (4):

Ct DEFt G G DDt FDt

 1   2   3 ( t ) Perm.HP   4 ( t ) Temp.HP   5  6  ut (3)
Yt Yt Yt Yt Yt Yt

Ct DEFt G G DDt FDt

 1   2   3 ( t ) Perm.VAR   4 ( t ) Temp.VAR   5  6  ut (4)
Yt Yt Yt Yt Yt Yt

6
For the REP to be valid, the following restriction should apply 2 = 4 = 5 = 0. If
government consumption substitutes private consumption, then 3 < 0, while if it
complements it 3 > 0.

For our study the data are taken from the International Monetary Fund’s International
Financial Statistics Yearbooks (IFS) and are:

Ct = private consumption at current prices (line 96f IFS) sum of durable and non-
durable goods
Yt = gross domestic product at current prices (line 99b IFS)
DEFt = government deficit at current prices (line 80 IFS)
Gt = government consumption at current prices (line 91f IFS)
DDt = domestic debt at current prices (line 88a IFS) denominated in domestic
currency
FDt = foreign debt at current prices (line 89a IFS) denominated in domestic currency
YGt = growth in real GDP (GDP (line 99b IFS) deflated by the consumer price index
CPI (line 64 IFS))
PGt = growth in population (line 99z IFS)
ut = a disturbance term

Table 1 lists the countries included in this paper and their GDP per capita in 1996 US
Dollar at purchase parity power.

Table 1. Level of income per capita.

GDP
Burundi 590
El Salvador 2810
Ethiopia 510
Honduras 2200
India 1650
Morocco 3130
Nigeria 880
Pakistan 1590
Sri Lanka 2460
Zimbabwe 2280
Note: GDP is Gross Domestic Product per capita US$ (PPP) 1996.

Given the limited and uneven availability of observations for each variable and each
country, an unbalanced panel (time-series/cross section) analysis will be used6. The
broadest sample period available is 1975-1999. However, when (2) is estimated with
the variable GDP and population growth, one initial observation is lost to calculate the
growth rates and the sample is further restricted to 1976-1998 because data on
population beyond 1998 are not available. To estimate (3), the broadest sample can be
used when we distinguish between permanent and temporary government

7
consumption by means of the Hodrick-Prescott filter, while two observations are lost
when we distinguish between permanent and temporary government consumption by
means of a VAR with two lags.
Furthermore, to provide robust results, three different methods will be used: OLS,
fixed effect and random effect. OLS estimation assumes a common intercept term for
each country. The fixed effect allows the intercept term to vary between the countries.
The random effect treats intercept terms as random variables across pool members. If
the countries are thought to be very similar, then OLS is appropriate. If it is assumed
that the countries are very different, the fixed effect should be used, while if it is
assumed that the countries are drawn randomly from a common population the
random effect method is preferred (see Baltagi (1995) and Greene (2000)). Estimation
will be carried out by using E-Views4. All the estimates use the White
heteroskedasticty covariance consistent method to take account of possible differences
in variance between countries.

The results are reported in tables 2, 3 and 4. The results of the estimation of the
original equation of Bernheim are given in table 2. We also estimated equation (1)
including the dummy variables for high indebtdness. In table 3 the results obtained
with equation (3) which exclude the growth variables YG and PG, but include the
distinction between permanent and transitory government consumption captured by
means of the Hodrick-Prescott filter. Likewise, in table 4 we report the results with
equation (4) excluding the growth variables YG and PG, but including the distinction
between permanent and transitory government consumption captured by means of a
VAR. Dummy variables for high indebtdness are also included (see below).

The deficit variable (DEF/Y) is significant in only one case, with a negative sign. The
variable capturing foreign debt (FD/Y) is significant only in two cases, one positive
and one negative while domestic debt (DD/Y) is significant only in three cases of
OLS estimation but the sign is negative. It appears that the REP might actually hold
for this sample of developing countries. Moreover, our results appear to indicate that
government consumption replaces private consumption, even when government
consumption is separated into transitory and permanent components. However, this
substitutability appears to be partial. The restriction 2 = 4 = 5 = 0 is rejected only in
the cases when the model is estimated by OLS and the rejection is due to the fact that
the variable DD/Y is significant and negatively signed.

Following Dalamagas (1992a, 1992b) dummy variables capturing the effect of

high/low level of foreign and domestic indebtedness were introduced in the models.
The dummy variable HIGH DD takes the value of one if the ratio DD/Y is above the
mean value of the sample. The average for the sample was 0.26. The dummy variable
HIGH FD takes the value of one if the ratio FD/Y is above the mean value of the
sample. The average for the sample was 0.39. The results clearly show that high levels
of debt (foreign and domestic) never have a positive effect upon consumption. On the
contrary the effect is negative, although it is significant only in two cases.

8
Table 2. Estimation results of equation (1),1976-1998. Panel data – 213 Observations.
Variables OLS Fixed RE OLS Fixed RE
Constant 0.81 0.79 0.77 0.78
(24.84)** (20.16)** (22.96)** (19.65)**
DEF/Y 0.006 -0.12 -0.11 0.088 -0.058 -0.05
(0.038) (-1.39) (-1.13) (0.54) (-0.54) (-0.46)
G/Y -0.39 -0.56 -0.54 - 0.36 -0.57 -0.55
(-2.42)** (-2.91)** (-3.53)** (-2.34)* (-3.01)** (-3.61)**
DD/Y -0.13 0.03 -0.02 0.07 0.093 0.08
(-2.86)** (0.59) (0.41) (0.79) (1.11) (1.14)
FD/Y 0.006 -0.021 -0.019 0.08 0.02 0.026
(0.23) (-0.98) (-1.07) (1.83)* (0.57) (0.85)
HIGH DD -0.05 -0.017 -0.017
(-2.60)** (-1.17) (-1.14)
HIGH FD -0.05 -0.03 -0.032
(-2.31)** (-1.70)* (-1.78)*
YG -0.001 -0.001 -0.001 -0.001 -0.001 -0.001
(-2.08)* (-1.84) (-2.43)** (-1.87)* (-1.82)* (-2.35)**
PG 3.43E-05 0.001 0.001 0.0002 0.001 0.001
(0.014) (1.36) (0.99) (0.93) (1.33) (1.05)
2
R 0.07 0.57 0.58 0.12 0.57 0.58
F-test for 3.44 0.92 0.79 1.34 1.06 1.08
restriction [0.017]** [0.42] [0.49] [0.26] [0.36] [0.35]
2 = 4 =
5 = 0
Number of 213 213 213 213 213 213
obs.
Notes: t-values in brackets
** significant at 5%
* significant at 10%
The variable HIGH DD is a dummy variable that takes the value of one if the ratio DD/Y is above the
mean value of the sample. The average for the sample was 0.26.
The variable HIGH FD is a dummy variable that takes the value of one if the ratio FD/Y is above the
mean value of the sample. The average for the sample was 0.39.
RE - estimation of random effects model.

9
Table 3. Estimation of equation (2) (permanent and temporary government
consumption estimated by means of the Hodrick-Prescott filter), 1975-1999. Panel
data, 224 observations.
Variables OLS Fixed RE OLS Fixed RE
Constant 0.81 0.79 0.77 0.79
(26.84)** (19.24)** (24.24)** (20.12)**
DEF/Y 0.002 -0.13 -0.13 0.08 -0.054 -0.04
(0.013) (-1.50) (-1.22) (0.52) (-0.50) (-0.41)
(G/Y)PermHP -0.40 -0.57 -0.54 -0.37 -0.66 -0.60
(-2.48)** (-2.20)** (-2.51)** (-2.38)** (-2.45)** (-2.82)**
(G/Y)TempHP -0.18 -0.40 -0.39 -0.20 -0.37 -0.36
(-0.40) (-1.46) (-1.59) (-0.45) (-1.380) (-1.46)
DD/Y -0.14 0.021 0.009 0.065 0.11 0.097
(-3.2)** (0.43) (0.18) (0.73) (1.36) (1.35)
FD/Y 0.0009 -0.027 -0.024 0.076 0.016 0.022
(0.03) (-1.21) (-1.36) (1.73)* (0.41) (0.73)
HIGH DD -0.054 -0.024 -0.024
(-2.74)** (-1.67)* (-1.67)*
HIGH FD -0.049 -0.032 -0.033
(-2.45)** (-1.80)* (-1.87)*
2
R 0.065 0.55 0.56 0.11 0.56 0.57
F-test for 4.28 1.25 1.06 1.55 1.12 1.20
restriction 2 [0.005]** [0.28] [0.36] [0.32] [0.33] [0.30]
= 4 = 5 = 0
Number of 224 224 224 224 224 224
obs.
Notes: t-values in brackets
** significant at 5%
* significant at 10%
The variable HIGH DD is a dummy variable that takes the value of one if the ratio DD/Y is above the
mean value of the sample. The average for the sample was 0.26.
The variable HIGH FD is a dummy variable that takes the value of one if the ratio FD/Y is above the
mean value of the sample. The average for the sample was 0.39.

10
Table 4. Estimation of equation (3) (permanent and temporary government
consumption estimated by means of a VAR), 1977-1999. Panel data, 206
observations.
Variables OLS Fixed RE OLS Fixed RE
Constant 0.81 0.77 0.77 0.76
(25.61)** (22.10)** (23.33)** (27.00)**
DEF/Y -0.029 -0.18 -0.17 0.053 -0.11 -0.052
(-0.17) (-1.84)* (-1.54) (0.31) (-0.99) (-0.41)
(G/Y)PermVAR -0.35 -0.40 -0.36 -0.33 -0.45 -0.33
(-2.17)** (-1.63)* (-1.96)* (-2.11)** (-1.82)* (-2.07)**
(G/Y)TempVAR -0.42 -0.66 -0.64 -0.28 -0.59 -0.46
(-0.81) (-2.09)** (-2.44)** (-0.53) (-1.84)* (-1.62)*
DD/Y -0.15 0.006 -0.013 0.062 0.081 0.028
(-3.22)** (0.10) (-0.25) (0.66) (0.85) (0.36)
FD/Y -0.0038 -.026 -.021 0.071 0.009 0.039
(-0.15) (-1.12) (-1.13) (1.55) (0.22) (1.19)
HIGH DD -0.055 -0.019 -0.025
(-2.64)** (-1.20) (-1.55)
HIGH FD -0.046 -0.024 -0.033
(-2.23)** (-1.30) (-1.72)*
R2 0.065 0.56 0.56 0.11 0.56 0.49
F-test for 4.18 1.57 1.23 0.92 0.96 0.78
restriction 2 [0.006]** [0.19] [0.34] [0.43] [0.41] [0.50]
= 4 = 5 = 0
Number of 206 206 206 206 206 206
obs.
Notes: ** significant at 5%
* significant at 10%
The variable HIGH DD is a dummy variable that takes the value of one if the ratio DD/Y is above the
mean value of the sample. The average for the sample was 0.26.
The variable HIGH FD is a dummy variable that takes the value of one if the ratio FD/Y is above the
mean value of the sample. The average for the sample was 0.39.

4. Conclusions

The objective of this paper was to assess the validity of REP for ten developing
countries. The theoretical analysis of the issues involved by REP in developing
countries showed that the problem is complex and REP cannot be ruled out a priori,
while an assessment of the empirical literature shows that evidence on the validity of
REP in developing countries is mixed. A standard model of private consumption was
estimated and the results appear to show some support for REP and warrant further
research in this area. However, the diversity of the countries examined and some
important limitations in the availability of data should advise caution in interpreting
the results.

11
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Appendix: Availability of Data.

C DEF DD FD YG PG G
Burundi 1975-99 1975-98 1975-98 1975-98 1976-99 1976-98 1975-99
El Salvador 1975-99 1975-99 1975-99 1975-99 1976-99 1976-98 1975-99
Ethiopia 1975-98 1975-96 1975-93 1975-92 1976-97 1976-98 1975-98
Honduras 1975-99 1975-98 1975-98 1975-98 1976-99 1976-97 1975-99
India 1975-98 1975-98 1975-98 1975-98 1976-98 1976-98 1975-98
Morocco 1975-98 1975-95 1975-95 1975-95 1976-98 1976-98 1975-98
Nigeria 1975-94 1975-98 1975-98 1975-98 1976-94 1976-97 1975-94
Pakistan 1975-99 1975-99 1975-98 1975-98 1976-99 1976-98 1975-99
Sri Lanka 1975-98 1975-99 1975-98 1975-98 1976-98 1976-97 1975-98
Zimbabwe 1975-97 1976-97 1975-97 1975-97 1976-96 1976-97 1975-97

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 Notes:
1
Tobin (1980), just to name one, argues that Ricardian Equivalence is very unlikely to hold given the
implausibility of its assumptions.

2
These measures can be administrative constraints in the selection of portfolio investments, compulsory
lending by banks, discriminatory taxation on assets other than government bonds and the conversion of
pension payments in bonds.
3
Sellers might also provide credit by deferring payments for purchases.
4
On this point, we also would like to thanks an anonymous referee for pointing out that the inclusion of
durables, which are more sensitive to transitory income, might bias the test against Ricardian
Equivalence.
5
The VAR model contained two lags of the ratio between government consumption and income and
two lags of the ratio between private consumption and income.
6
Detailed description of the available sample periods for each variable is in the appendix.

16

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