Testing the Ricardian Equivalence Theorem: Time Series Evidence from Turkey

Abstract

Two of the most common measures adopted by the government to stimulate the economy are increasing government borrowings and implementing tax cuts. These tax cuts are financed through increased debt. According to the Ricardian equivalence theory, the consumers will not change their current spending when they anticipate a tax increase in the future. In order to pay high taxes in the future, the government should increase its present savings. However, the extent of applicability of Ricardian equivalence could vary across nations. In this context, the present study explores the long-running relationship between domestic borrowing and private savings in Turkey. For this purpose, the researcher collected the data for key variables, gross domestic savings, and government debt, for the period of 1980–2017. The researcher used unit root, cointegration, VECM, and the Granger causality test to examine the relationships among the variables. Apart from this, ARDL regression was used in order to examine the long-term relationships among the variables. The empirical results indicate that there is presence of bidirectional causality, indicating that Ricardian equivalence is applicable in the economy. Households display a rational behavior by increasing their savings during the periods in which high government expenditure is incurred.

Effects of the pandemic crisis on entrepreneurship and sustainable development

“…First is the effect that fiscal policy has on long-term expectations. The greater indebtedness caused by the measures designed to combat the negative effects caused by COVID would lead, according to the Ricardian equivalence theory ( Hayo and Neumeier, 2017 , İkiz, 2020 ), to entrepreneurs thinking that taxes will have to increase to face the deficit with the corresponding reduction in demand. If, as an alternative to raising taxes, indebtedness continues to increase with the corresponding expected increase in interest rates, we will continue expecting the corresponding increase in taxes that will be even higher than that which would correspond if the debt had not increased.…”