Common stochastic trends and the ricardian equivalence in the OECD

The validity of the Ricardian Equivalence has always been an active field of research. The theorem states that with given government consumption, the consumption of households should be stable to compensate for future taxes. The paper attempts to investigate the long-run relationship between public debt and private consumption. The framework under examination is fifteen country members of the OECD. Using VAR and VEC models and applying the Johansen procedure for cointegration, variance decomposition and a “Generalised Impulse Response Function” the findings based on annual data for the period 1980 – 2010 support the existence of a positive relationship between debt and consumption in Australia, Canada, Iceland and the U.S. For the rest of the country members, the increased private savings do not offset increased government debt.