Ricardian equivalence and super exogeneity: a new approach

In response to the 2008-2009 global financial crisis (GFC), several governments across the world, including Australia, made frenzied efforts to stimulate their economies by increasing spending and accumulating huge deficits. While the effects of stimulus packages are yet to be revealed, the fiscal measures can be effective only if the consumers are non-Ricardian. For this reason, Abdullaev and Kónya (2010, 2012) test the Ricardian equivalence (RE) hypothesis for Australia over the periods 1901-1974 and 1901-2007 on the basis of traditional and Euler-type consumption functions and conclude that it is unlikely to hold. The objective of this paper is to present further evidence to support this conclusion by adapting the novel approach of Sachsida and Teixeira (2000) for the first time. This procedure builds on the links between RE and the Lucas critique and between the Lucas critique and super exogeneity. Our results indicate that government debt is not super exogenous in the conditional model for domestic savings and henceforth RE does not hold in Australia.