Testing of the Ricardian Equivalence proposition: An Empirical Examination for Malaysia (1962-2006)

Ismail, Ismadi ( Faculty Business and Management, Universiti Teknologi MARA, Malacca Campus, 78000 Alor Gajah, Melaka)
Ismail, Abdul Ghafar ( Islamic Economics and Finance Research Center (EKONIS) and Chairman Shari’ah Committee, Citibank Berhad.)
Amiruddin, Rosilawati ( aculty Business and Management, Universiti Teknologi MARA, Malacca Campus, 78000 Alor Gajah, Melaka.)

Gadjah Mada International Journal of Business
Vol 10, No 2 (2008): May - August

This paper investigates the effects of debts and budgetary deficit on real variables using structural Vector Error Correction Model (VECM) method with long-run restrictions. We compare our estimates of the impulse responses with those based on levels Vector Auto-Regressive (VAR) with standard recursive order restrictions. The test is conducted on the Malaysian data covering the period of 1962-2006. The empirical results do not support the existence of “Ricardian Equivalence” hypothesis. The effects of budgetary deficit and government spending have a significant influence on private consumption and private investment.