Abstract
This paper investigates the effects of government debt and money on real economic activity and tests the neutrality and Ricardian equivalence hypotheses. Since the observance of a positive correlation between debt and output does not necessarily imply that government bonds are net wealth, a distinction is made among anticipated changes in debt growth, unanticipated changes in debt growth, and the level of debt. The empirical evidence for the period 1957:iv-1984:iv indicates that the neutrality and Ricardian equivalence hypotheses cannot be rejected. The empirical findings also suggest that the rejection of the neutrality hypothesis in some of the previous studies could be due to a specification error caused by the omission of debt variables.
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