VALIDITY OF RICARDIAN EQUIVALENCE HYPOTHESIS: A CASE STUDY BASED ON THE CLUSTER OF DEVELOPED AND DEVELOPING COUNTRIES

Author(s) : Rehan Ahmad Khan Sherwani, Hafiz Muhammad Nawaz and Atif Khan Jadoon

Abstract:

This study examines the existence of the Ricardian Equivalence Hypothesis (REH) in the combined case of Group of Seven (G7) and South Asian Association of Regional Cooperation (SAARC) countries. This study is done under the assumption that the combined case of developed and developing economies will give evidence of REH. A panel data set from 2001 to 2019 is utilized for seven variables; Disposable Income, Household Final Consumption Expenditure, Government Budget Deficit, General Government Gross Debt, General Government Total Expenditure, General Government Revenue, and Wealth. The stationarity of these variables has checked by five different unit root tests; IPS, Fisher and Choi based ADF, and Fisher and Choi based PP. In the light of the Hausman test, we have adopted the random effect model to precede Panel Least Square (PLS). After applying PLS, the Wald test has rejected all restrictions which were applied to prove the existence of REH in developed and developing economies. Results showed that fiscal policy should be one of the stabilization policies in this understudy economic world to control the revenues and expenditure side.