E3 Journal of Business Management and Economics
E3 Journal of Business Management and Economics Vol. 3 (6) pp. 258-265, June 2012; © E3 Journals; ISSN 2141-7482
Ricardian equivalence hypothesis: Evidence from Pakistan
Muhammad Afzal1 *1 Department of Management Sciences, COMMSATS Institute of Information Technology, Islamabad- Pakistan
*Corresponding Author E-mail: profafzal@gmail.com
Accepted 30 April 2012
Abstract
This paper provides empirical evidence on the soundness and relevance of the Ricardian equivalence hypothesis (REH) for Pakistan over the period 1960__2009. Time series properties have been examined in order to take care of the criticism made against the previous studies on REH notably model-specification, simultaneity bias and stationarity of data. Real income, real consumption, real government expenditure and real government revenue, though nonstationary, are not cointegrated. There is unidirectional causality from real income to real consumption, real government expenditure and real government revenue and from real government expenditure to real government revenue. We used impulse response functions to ascertain the impact of shocks of one variable upon others. The impact of real government expenditure and real government revenue on consumption is most notable and substantial that provides some support in favour of the REH. This happens in the short-run. Stabilization policies are adopted that aim at averting those shocks that harm the economy substantially in the short-run.
Keywords: Ricardian Equivalence; Granger-causality; Impulse Response Functions. JEL Classification: H3
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