Munich Personal RePEc Archive

We are living on the cost of our children

Waqas, Muhamad and Awan, Masood Sarwar and Aslam, Muhammad Amir (2011): We are living on the cost of our children. Published in: Interdisciplinary Journal of Contemporary Research in Business , Vol. 3, No. 2 (2011): pp. 607-623.

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The strict assumptions of Ricardian Equivalence Hypothesis hoist the debates on this issue among different school of thoughts. Its validity entails certain assumptions which raise the doubts on its validity especially in the context of developing countries like Pakistan. The aim of this study is to check the validity of Ricardian Equivalence Hypothesis and its sources of deviation in case of Pakistan. The study use annual data for the period of 1973-2009. Engle and Granger and Johansen cointegration approaches depicts the long run relationship among variables. Generalized Method of Moment results shows that the presence of liquidity constraints and infinite horizons are the sources of failure of Ricardian Equivalence Hypothesis. These findings illustrate concentration towards the importance of fiscal policies in raising private consumption and controlling budget deficits, which are the prime goals of stabilization policies.

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