Testing Ricardian Equivalence with the Narrative Record on Tax Changes

Alfred Haug

Oxford Bulletin of Economics and Statistics, 2020, vol. 82, issue 2, 387-404

Abstract: The Ricardian equivalence hypothesis is tested empirically with a subcategory of the narrative measures of US tax shocks developed by Romer and Romer (in, American Economic Review 2010;100:763). The present value of tax increases motivated solely by concerns for improving the fiscal health of the government is used. These tax news represent a switch from debt to tax financing that should have no effects on real output and consumption. For the post‐1982:IV period, fiscal anticipation plays an important role as many of the tax increases are implemented with substantial delays. Anticipated tax hikes increase economic activity in the delay period. Ricardian equivalence is rejected.

Date: 2020
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