Does Ricardian equivalence hold in Australia? A revision based on testing super exogeneity with impulse-indicator saturation

Abstract

Following the 2008–2009 Global Financial Crisis, many countries, including Australia, enacted fiscal stimulus packages in the hope of reviving their economies by encouraging aggregate demand. For the success of these efforts, it is vital that fiscal policies have some positive impact on the real economy. However, tax reductions and cash handouts are virtually ineffective if consumers are Ricardian and internalise the intertemporal budget constraint of the government. This paper aims to test the Ricardian equivalence hypothesis for Australia from 1960 to 2011 by exploiting the links between (1) Ricardian equivalence and the Lucas critique; (2) the Lucas critique and super exogeneity, and (3) ..