ARE INCREASES IN GOVERNMENT SPENDING NEUTRAL? EVIDENCE FROM LATIN-AMERICAN HOUSEHOLDS

Using a dynamic optimization model, Ricardian Equivalence (RE) is empirically tested for Argentina, Brazil, Chile and Mexico. The system of equations obtained in the theoretical model is solved using Generalized Method of Moments and Full Information Maximum Likelihood. Results indicate that the null hypothesis concerning RE cannot be rejected for Argentina, Brazil, and Chile but is strongly rejected for Mexico. Therefore, when the fiscal authority seeks to stimulate economic activity by means of tax reductions and increases in government spending, the outstanding effect might be only a rise in private savings for the first three countries.