Fiscal adjustments in Europe and Ricardian equivalence

Abstract

According to the ‘Ricardian’ equivalence hypothesis, consumption is dependent on permanent disposable income and current deficits are equivalent to future tax payments. This hypothesis is tested on 14 European countries in the 1990s. The relationships between private sector savings and general government deficit, and the GDP growth rate and the unemployment rate are determined. The results show the change in consumers' behaviour with respect to government deficit, and that expectations of an increase in future wealth are no longer associated with a decrease in deficit.

Keywords

• Europe
• Economic aspects