Munich Personal RePEc Archive

The effects of tax-cuts and government bonds on aggregate demand

Bilgili, Faik (1998): The effects of tax-cuts and government bonds on aggregate demand. Published in: Journal of Faculty of Economics and Administrative Sciences, Erciyes University No. 13 (1998): pp. 123-130.

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Abstract

Ricardian Equivalence states that the choice between tax-cuts and debt finance have no effect on resource allocation between private investment and consumption in the economy, for given government expenditures. Studies of this statement yield controversial results. This controversy may arise due to simply the fact that the testing models employ different variables. In testing the equivalence, the data or sample period by itself may cause statistical rejection (acceptance) at a certain level of significance, although theory is correct (wrong). Or failure of Ricardian Equivalence may originate in structure of economies under study, i.e., imperfect credit markets. The result from a model that uses both contemporaneous and lagged values of variables indicates that Ricardian Equivalence holds. If this statistical result is true, government deficits or debt outstanding due to tax-cuts are irrelevant to alter the levels of investment, savings and aggregate demand, for given government expenditures.

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