DefinePK

Abstract

During the last three decades, the Ricardian Equivalence Hypothesis (REH) has been an important theme of economic research both theoretical and applied in the industrial countries especially the US. However, very limited work has been done in the developing countries to test the validity and consistency of this hypothesis. In this paper an attempt has been made to present some empirical tests of the hypothesis for Pakistan using the macroeconomic data for the period 1960-88 based on the standard Blanchard-Evans Models of intertemporal allocation of resources as affected by the perceptions of the consumers about debt accumulation. The paper has been divided into three parts. In part-I, a brief introduction to the Ricardian Equivalence Hypothesis as well its origins has been delineated. In part-II, the Blanchard (1985) Model has been outlined along with the testable hypotheses as derived by Evans (1988). Part-III summarily presents the results of the Blanchard-Evans Models as applied to Pakistan data. These results fail to validate the Ricardian Equivalence Hypotheses for Pakistan. However the results are sensitive to the manner in which the critical variable namely “wealth” is defined and the manner in which the models are estimated. Therefore, further research is required on the subject especially in the contest of Pakistan’s economy which has accumulated large public debt so as to analyse precisely the extent to which public debt is discounted by the consumers as future tax liabilities.