Answer to Question #216108 in Microeconomics for Karan Wadhwa

Question

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

 

�At = a0 + a1�Bt + μt

 

where A is the public’s net real financial assets (excluding its holdings of government bonds), B is real public debt and μ is a random term. Does aˆ1 = 1 confirm 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.

 

Answer 1

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