Application of Panel Co-integration Approach to Verify Ricardian Equivalence Hypothesis in G8 and SAARC Countries

Abstract

This study investigates the validity of Ricardian Equivalence Hypothesis in case of G8 and SAARC countries by using fourteen year annual panel data from 2001 to 2014. We used seven variables; household final consumption expenditure, disposable income, government budget deficit, general government gross debt, general government total expenditure, general government revenue, and wealth for this analysis. The results of Unit Root tests (IPS, Fisher and Choi base ADF and PP) suggest that all variables are I(1). Johansen Base Panel Co-integration approach verifies the existence of long run relationship among variables for all three cases; G8 and SAARC combine, G8 and SAARC individually. Short run relationship also exists in G8 and SAARC, and individual SAARC case but not in G8 case.