Testing Ricardian Neutrality with an Intertemporal Stochastic Model.

This paper's purpose is to develop and estimate a stochastic, intertemporal model of consumption be havior and to use it for testing a version of the Ricardian-equivalen ce proposition with time-series data. Two channels that may give rise to deviations from this proposition are specified: finite horizons a nd liquidity constraints. In addition, the model incorporates explici tly the roles of taxes, substitution between public and private consu mption, and different degrees of consumer goods' durability. The evid ence, based on data for Israel in the first half of the 1980s, suppor ts the Ricardian neutrality specification, yielding plausible estimat es for the behavioral parameters of the aggregate consumption functio n. Copyright 1988 by Ohio State University Press.