The effects of budget deficit on national saving in the OECD

Abstract

In this paper, we estimate a structural VAR using a panel of OECD countries, which includes national saving and budget deficit, both as the ratio to GDP, to test the Ricardian Equivalence hypothesis. In this framework, we separate saving and deficit movements into two types of shocks, associated with structural parameters of these economies. Our results suggest that Ricardian Equivalence did not work in our sample of OECD countries, since private saving compensated only a small fraction budget deficit. This supports the interpretation that the large budget deficits have been a very important factor behind the significant increase in real interest rates in the eighties and early nineties.