NEW EVIDENCE ON THE RICARDIAN EQUIVALENCE THEOREM - A MULTICOINTEGRATION APPROACH

This paper derives major theoretical constructs which underlie Richard ian equivalence, and using multicointegration methodology, empirically tests whether they bear out. Results indicate that government spendin g and revenues are cointegrated. However, the cointegrating scalar is less than one. Therefore, in order for government to obey its intertem poral budget constraint, debt and government revenue must be multicoin tegrated; they are not. Additional evidence indicates that saving and debt may be weakly cointegrated. The findings suggest that failure of Richardian equivalence may be due to public rather than private sector failure.