Does the Ricardian Equivalence Proposition Hold in SAARC Countries?

Abstract

The current study explored the cogency of the Ricardian Equivalence
Hypothesis (REH) in SAARC. For it, 29 years, time-series data from
1990 to 2018 have been used1. The Fixed effect model and Panel
cointegration tests have been applied to consider the affiliation among
the regressors. The fallouts of the study indicate that government debt
and private consumption have a long-run cointegrated liaison with
each other. The outcomes of the study reject the certainty of Ricardian
equivalence in SAARC. Along with an upturn in government debt,
private consumption increases and people do not postpone current
consumption despite increasing government debt and expected taxes,
which can be levied in future to repay the debt obligations. In addition,
real GDP and Real government expenditure stimulate while real tax
revenue discourages private consumption. The study also found two
way causality between government debt and private consumption. The
results also imply that fiscal policy is adequate to stabilize the
economy.