Summary
In this paper the intertemporal optimization approach is adopted in order to estimate an empirical version of Blanchard's (1985) overlapping generations model. The observed sluggishness in consumption is incorporated into the model by recognizing both durability and habit formation as relevant determinants of total consumption. The model is estimated using quarterly data for The Netherlands from 1969:I to 1990:IV. The empirical estimates suggest that the status of the Dutch consumer as a true Ricardian is unambiguously rejected. The results furthermore suggest that this rejection is due to the existence of both liquidity constraints and finite planning horizons.
Similar content being viewed by others
References
Alessie R., A. Lusardi and A. Kapteyn, 1995,Saving and Wealth Holdings of the Elderly, CentER Discussion Paper, no. 9593, Tilburg University, The Netherlands.
Aschaner, D.A., 1985, ‘Fiscal Policy and Aggregate Demand,’American Economic Review, 75, pp.117–127.
Barro, R.J., 1974, ‘Are Government Bonds Net Wealth?,’Journal of Political Economy, 82, pp. 1095–1117.
Bean, C.R.; 1986, ‘The Estimation of “Surprise” Models and the “Surprise” Consumption Functions,’Review of Economic Studies, 53, pp. 497–516.
Bernanke, B., 1985, ‘Adjustment Costs, Durables, and Aggregate Consumption,’Journal of Monetary Economics, 15, pp. 41–68.
Berndt, E.R., B.H. Hall, R.E. Hall, and J.A. Hausman, 1974, ‘Estimation and Inference in Nonlinear Structural Models,’Annals of Economic and Social Measurement, 3, pp. 653–665.
Bernheim, B.D., 1987, ‘Ricardian Equivalence: An Evaluation of Theory and Evidence,’NBER Macroeconomics Annual, 2, pp. 263–304.
Bernheim, B.D. and K. Bagwell, 1988, ‘Is Everything Neutral?,’Journal of Political Economy, 96, pp. 308–338.
Blanchard, O.J., 1985, ‘Debts, Deficits, and Finite Horizons,’Journal of Political Economy, 93, pp. 223–247.
Campbell, J.Y. and N.G. Mankiw, 1989, ‘Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence,’NBER Macroeconomics Annual, 4, pp. 185–216.
Campbell, J.Y. and N.G. Mankiw, 1991, ‘The Response of Consumption to Income: A Cross-country Investigation,’European Economic Review, 35, pp. 723–767.
Dalen, H.P. van, 1992, ‘On the Demographic Realism of the Ricardian Theory of Public Finance,’De Economist, 140, pp. 204–232.
Deaton, A., 1987, ‘Life-cycle Models of Consumption: Is the Evidence Consistent with the Theory?,’ in: T.F. Bewley (ed.),Advances in Econometrics, Fifth world congress, II, Cambridge, Cambridge University Press.
Deaton, A., 1991, ‘Saving and Liquidity Constraints,’Econometrica, 59, pp. 1221–1248.
Deaton, A., 1992, Understanding Consumption, Oxford, Clarendon Press.
Dickey, D.A. and W.A. Fuller, 1981, ‘Likelihood Ratio Statistics for Auto-regressive Time Series with a Unit Root,’Econometrica, 49, pp. 1057–1072.
Eichenbaum, M.S., L.P. Hansen, and K.J. Singleton, 1988, ‘A Time Series Analysis of Representative Agent Models of Consumption and Leisure Choice under Uncertainty,’Quarterly Journal of Economics, 103, pp. 51–78.
Evans, P., 1988, ‘Are Consumers Ricardian? Evidence for the United States,’Journal of Political Economy, 96, pp. 983–1004.
Evans, P., 1989,Do Budget Deficits Affect the Current Account?, Working paper, Ohio State University.
Evans, P., 1991, ‘Is Ricardian Equivalence a Good Approximation?,’Economic Inquiry, 29, pp. 626–644.
Feldstein, M., 1982, ‘Government Deficits and Aggregate Demand,’Journal of Monetary Economics, 9, pp. 1–20.
Fissel, G.S. and T. Jappelli, 1990, ‘Do Liquidity Constraints Vary over Time? Evidence from Survey and Panel Data,’Journal of Money, Credit, and Banking, 22, pp. 253–262.
Flavin, M.A., 1981, ‘The Adjustment of Consumption to Changing Expectations about Future Income,’Journal of Political Economy, 89, pp. 974–1009.
Flavin, M.A.; 1987, ‘Comment,’NBER Macroeconomics Annual, 2, pp. 304–309.
Frenkel, J.A. and A. Razin, 1986, ‘Fiscal Policies in the World Economy,’Journal of Political Enonomy, 94, pp. 564–594.
Frenkel, J.A. and A. Razin, 1987,Fiscal Policies and the World Economy: An Intertemporal Approach, Cambridge, MA, MIT Press.
Hall, R.E., 1978, ‘Stochastic Implications for the Life-cycle Permanent Income Hypothesis: Theory and Evidence,’Journal of Political Economy, 86, pp. 971–988.
Hansen, L.P. and K.J. Singleton, 1982, ‘Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models,’Econometrica, 50, pp. 1269–1286.
Hayashi, F., 1987, ‘Tests for Liquidity Constraints: A Critical Survey and Some New Observations,’ in: T.F. Bewley (ed.),Advances in Econometrics, Fifth world congress, II, Cambridge, Cambridge University Press.
Heijdra, B.J., 1993,Ricardian Equivalence in the Dutch Economy, Tinbergen Institute Discussion Paper TI93-152.
Leiderman, L. and A. Razin, 1988, ‘Testing Ricardian Neutrality with an Intertemporal Stochastic Model,’Journal of Money, Credit, and Banking, 20, pp. 1–21.
Leiderman, L. and M. Blejer, 1988, ‘Modelling and Testing Ricardian Equivalence: A Survey,’IMF Staff Papers, 35, pp. 1–35.
Mankiw, N.G., J.J. Rotemberg, and L.H. Summers, 1985, ‘Intertemporal Substitution in Macroeconomics,’Quarterly Journal of Economics, 100, pp. 225–251.
Mariger, R.P., 1987, ‘A Life-cycle Consumption Model with Liquidity Constraints,’Econometrica, 55, pp. 533–557.
Muellbauer, J. and R. Lattimore, 1995, ‘The Consumption Function: A Theoretical and Empirical Overview’, in: M.H. Pesaran and M. Wickens (eds.),Handbook of Applied Econometrics: Macroeconomics, Oxford, Basil Blackwell.
Nelson, C.R. and C.J. Plosser, 1982, ‘Trends and Random Walks in Macroeconomic Time Series,’Journal of Monetary Economics, 10, pp. 139–162.
Park, J.Y. and P.C.B. Phillips, 1988, 1989, ‘Statistical Inference in Regressions with Integrated Processes, Parts 1 and 2,’Econometric Theory, 4, pp. 468–497, and 5, pp. 95–131.
Perron, P., 1989, ‘The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis,’Econometrica, 57, pp. 1361–1401.
Pesaran, M.H. and R.A. Evans, 1984, ‘Inflation, Capital Gains and U.K. Personal Savings: 1953–1981,’Economic Journal, 94, pp. 237–257.
Phillips, P.C.B., 1991, ‘Optimal Inference in Cointegrated Systems,’Econometrica, 59, pp. 283–306.
Pollak, R.A., 1970, ‘Habit Formation and Dynamic Demand Functions,’Journal of Political Economy, 78, pp. 745–763.
Romer, D., 1988, ‘What are the Costs of Excessive Deficits?,’NBER Macroeconomics Annual, 3, pp. 63–98.
Sargent, T.J., 1981, ‘Estimation of Dynamic Labour Demand Schedules under Rational Expectations,’ in: R.E. Lucas and T.J. Sargent (eds.),Rational Expectations and Econometric Practice, London, Allen and Unwin.
Sargent, T.J., 1987,Macroeconomic Theory. Second edition, New York, Academic Press.
Spinnewyn, F., 1981, ‘Rational Habit Formation,’European Economic Review, 15, pp. 91–109.
Weil, Ph., 1989, ‘Overlapping Families of Infinitely-lived Agents,’Journal of Public Economics, 38, pp. 183–198.
Winder, C.C.A. and EC. Palm, 1989, ‘Intertemporal Consumer Behaviour under Structural Changes in Income,’Econometric Reviews, 8, pp. 1–87.
Zeldes, S.P., 1989, ‘Consumption and Liquidity Constraints: An Empirical Investigation,’Journal of Political Economy, 97, pp. 305–346.
Author information
Authors and Affiliations
Additional information
Comments by Peter Broer, Jeroen Kremers, Debora Molenaar, Rick van der Ploeg, Frans Spinnewyn, Casper de Vries, Ed Westerhout and two anonymous referees are very much appreciated. Elbert Dijkgraaf has provided invaluable research assistance. We also thank participants of the OCFEB workshop and the CES seminar at the K.U. Leuven for their comments.
Rights and permissions
About this article
Cite this article
Heudra, B.J., van Dalen, H.P. Is the Dutch consumer a true ricardian?. De Economist 144, 591–615 (1996). https://doi.org/10.1007/BF01371941
Issue Date:
DOI: https://doi.org/10.1007/BF01371941