Purpose: This study sought to examine the role of fiscal multipliers in high-debt economies. Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library. Findings: The findings reveal that there exists a contextual and methodological gap relating to the role of fiscal multipliers in high-debt economies. Preliminary empirical review revealed that fiscal multipliers were generally weaker in high-debt economies due to limited fiscal space, reduced confidence, and concerns about sustainability. However, countries with strong institutions and well-targeted spending still achieved moderate multiplier effects. The effectiveness of fiscal policy depended not just on spending levels, but also on timing, composition, and governance quality. Unique Contribution to Theory, Practice and Policy: The Keynesian Theory of Aggregate Demand, Ricardian Equivalence Hypothesis and the Debt Overhang Theory may be used to anchor future studies on the role of fiscal multipliers. The study recommended focusing fiscal efforts on high-return sectors, improving institutional efficiency, and ensuring transparency in public spending. It advised coordinating fiscal and monetary policy and using flexible rules to balance short-term stimulus with long-term debt goals. International agencies were encouraged to tailor support to high-debt contexts and invest in public finance reform.

Public debt has two faces, here called the «face of Janus». On one side, it stands in competition with private debt: less public debt reduces the interest rate and creates space for private capital formation and investment («crowding out», where the «Ricardian equivalence» also holds). On the other side, public debt is, in the same amount, private wealth, which must be added to the real wealth of the economy (plus land). In this way, individuals can provide for their old age beyond the capacity of the producing sectors to build up real capital. These two faces are then identified with two different regimes: the «neoclassical regime», where (real) interest rates are equal or higher than the (natural) growth rate of the economy; and the «Keynesian regime», where interest rates are lower than the growth rate. While in the dynamic version of the neoclassical regime the (natural) growth rate is determined by the (exogenously given) growth rates of the labour force and technical progress, the dynamic version of the Keynesian Regime is determined by the investment rate given by the «animal spirits» and the capital-output ratio or capital productivity, allowing for inflation and secular stagnation. Therefore, a literature review is undertaken to discuss general and specific reasons for low (or even negative) real interest rates, stressing excess savings and a shift in the investment schedule, resulting in what C. C. von Weizsäcker and H. Krämer call «the great divergence» in their book Saving and Investment in the Twenty-First Century: The Great Divergence. The paper comes to the conclusion that, given the low (real) interest rates, public debt fulfils an important task in bringing the (natural) rate of interest out of the negative zone and thus bringing the economic system out of the dangers of permanent under-utilization of resources (or unemployment).

The relationship between budget deficits and interest rates has been a central theme in macroeconomic discourse, influencing fiscal and monetary policy decisions worldwide. Classical economic theories suggest that rising budget deficits exert upward pressure on interest rates through the mechanism of crowding out private investment. However, empirical evidence on this relationship remains mixed and often context-dependent. Some studies suggest that deficits drive interest rates higher, while others emphasize mitigating factors such as global capital flows and accommodative monetary policy. This paper explores multiple theoretical perspectives, including the crowding-out hypothesis, Ricardian equivalence, the portfolio balance model, and the interaction between fiscal expectations and monetary policy. Empirical evidence from cross-country studies, time-series analyses, and recent fiscal expansions during the COVID-19 pandemic is synthesized to present a nuanced view. Special attention is given to emerging markets, where the relationship tends to be more pronounced due to higher risk premia. Additionally, the role of debt sustainability and investor confidence is emphasized. By integrating theoretical insights with empirical findings, the study offers a comprehensive understanding of the conditions under which budget deficits affect interest rates and outlines policy recommendations for managing fiscal deficits effectively without destabilizing financial markets.

Worsening the budget and current account balance has been one of the government’s most urgent issues, especially since the 1980s. Within this context, various studies have been conducted to find the accurate solution and whether there is a connection between the two unpleasant macroeconomic problems. The study aims to address the twin-deficit hypothesis at the full and sub-samples, with different frequencies, by employing the advanced causality test approaches in the case of the Turkish economy by considering energy prices. The Toda-Yamamoto, the Rolling-Window, and Breitung-Candelon Causality analyses are performed on the monthly data spanning from 2009:01 to 2024:08. When examining the evidence on the entire sample, the Ricardian Equivalence hypothesis is verified, and energy prices induce the budget deficit. However, the current account deficit and energy prices affect the budget defict in the short run due to the outcome of the spectral analysis. The Rolling window discloses the causality relationship among the variables at the varied time intervals. The final testament of the study approves the Ricardian Equaliance in the case of Türkiye and rejects the twin-deficit hypothesis. The policy actions are recommended for the policy-makers based on the evidence obtained in the study.

The complex relationship between public debt, economic growth, and revenue generation is an essential aspect of macroeconomic management, particularly for developing nations like Nepal. This paper offers an in-depth analysis of Nepal’s foreign and domestic debt management practices from 1974/75 to the present, focusing on the evolution of public debt and its interplay with economic growth, revenue generation, and fiscal sustainability. The period around 1974/75 marked a significant turning point for Nepal, initiating a shift in the country’s reliance on external financing due to domestic fiscal constraints and political instability. Through an extensive review of historical data, economic theories, and comparative analysis with other South Asian nations, this paper explores how both internal and external debt have affected Nepal’s development trajectory, revenue systems, and long-term growth prospects. Using a variety of economic models and principles, including debt-overhang, Ricardian equivalence, and the fiscal multiplier, the study provides a comprehensive understanding of how public debt influences national economic outcomes. The paper further investigates the challenges associated with debt sustainability, rising debt servicing costs, and the crucial role of domestic revenue generation in managing Nepal’s debt trajectory. With robust empirical data from credible sources, this study provides a thorough examination of Nepal’s debt history, policy reforms, and economic outcomes. It offers new insights into the importance of managing both external and internal debt effectively to ensure long-term fiscal health and sustainable growth. The paper concludes with policy recommendations on debt management, revenue mobilization, and growth strategies for Nepal and other countries facing similar challenges.

This article examines how James Buchanan came to write Public Principles of Public Debt, his first sole-authored book. We explore the evolution of Buchanan’s views on public debt, particularly his rejection of the three central propositions of what he called the “new orthodoxy.” We show how he initially recognized the significance of Ricardian equivalence (the relationship between taxes and loans), later rejected it, and ultimately criticized the analogy between private and public debt. Our analysis draws on a draft paper titled “Taxes versus Loans. Variations on a Ricardian Theme,” tracing Buchanan’s gradual intellectual development and the factors that influenced his theory of public debt. This study not only clarifies Buchanan’s thinking process but also sheds light on the formation of Public Principles of Public Debt, contributing to a better understanding of its economic content.

Amidst the COVID-19 crisis, the Malaysian government responded decisively, implementing substantial fiscal expansion measures to combat the pandemic's spread and safeguard the economy. In the second quarter of 2020, the current account surplus decreased to RM5.6 billion, or 1.7% of GDP, raising concerns of a twin-deficit. Keynesians relate fiscal deficits to the twin-deficit hypothesis. This study will use data from 2008Q1 to 2022Q4 to investigate the validity of the theory on Malaysia in the aftermath of the COVID-19 pandemic. For empirical analysis, the Nonlinear Autoregressive Distributed Lag (NARDL) approach will be used. Results show that fiscal deficits have neither short- or long-run effect on the current account, confirming the Ricardian Equivalence Hypothesis (REH), which holds that fiscal deficits do not affect the current account balance. In addition, research findings confirm the significance of economic growth and exchange rates in augmenting the surplus of the current account. Therefore, it is crucial to prioritise the successful execution of the National Investment Master Plan 2030, the Twelfth Malaysia Plan, and the New Industrial Master Plan 2030 in order to effectively address the prevailing economic challenges. These efforts have the potential to boost economic revitalization and foster long-term growth.

This study explores the correlation between budget deficits and current account deficits, as stated by the twin deficit hypothesis, in the specific setting of Jordan’s economy. The Keynesian view proposes that budget deficits lead to current account deficits, whereas the Ricardian equivalence theory disputes this idea. Additionally, the research examines the Feldstein-Horioka hypothesis from 1980 about the connection between saving and investment. By using cointegration analysis, this study demonstrates a lasting connection between budget deficits and current account deficits, providing evidence for the Keynesian perspective. The findings support the twin deficit theory’s applicability to Jordan’s economic situation and strengthen the Keynesian view on the relationship between the current account, budget deficit, and investment. Moreover, the existence of a negative correlation coefficient of less than 1 linking investment and saving supports the Feldstein-Horioka hypothesis, pointing to Jordan’s inclusion in international capital markets.

Unconventional monetary and fiscal policy

On the Misunderstanding Triggered by Ricardian Equivalence Theorem and the Optimization of the Public Debt Mechanism

This paper examines the effect of fiscal policy on private expenditure in a small open economy (i.e., Indonesia) through an open economy structural VAR (SVAR) study. The data set comprised a quarterly time series spanning from 2000:1-2022:4. Impulse response function (IRF) and variance decomposition (VDC) were used to analyze the effect of fiscal policy shocks on private expenditure. The main results indicated that government spending shocks crowded out private consumption. Domestic income gave a similar negative effect that can be explained by Ricardian equivalence theory which showed a reduction in private consumption. The effect of government tax revenue on private consumption was positive. The results supported the non-Keynesian effect which suggested that the increase in government tax revenue tended to increase private consumption. Similarly, domestic income showed a positive effect.

The study reinvestigates the 'Ricardian Equivalence hypothesis in India by taking private consumption as the dependent variable. The study aims to empirically study the impact of debt financing versus tax of fiscal deficit in the Indian context, as Indian policymakers primarily rely on fiscal policy as a tool for economic stability and growth. ARDL, FMOLS and DOLS approach was used by taking annual time series data from 1988 to 2023. The study reinvestigates the 'Ricardian Equivalence hypothesis in India by taking private consumption as the dependent variable. Government expenditure, public debt, tax, domestic income, and liquidity constrain as independent variables. The estimates confirm a significant symmetric as well as symmetric long-run and short-run relationship between the variables; the results reject the Ricardian Equivalence and propound the Keynesian approach that financing the fiscal deficit (debt vs tax) does matter to the private consumption expenditure. The positive and significant coefficient shows that the increase in liquidity will lead increase in private consumption expenditure. Over-reliance on debt financing strategies has a significant influence on domestic private consumption. The liquidity constraints, fiscal policies will be able to reallocate resources from the future to the present. Since debt financing of deficits and liquidity substantially influence India's consumer spending, expansionary fiscal policies should be carefully devised and supported. This study contributes to the existing literature on deficit financing and 'Ricardian Equivalence' by giving new evidence on designing sustainable fiscal policy by spending wisely without imperilling the country's consumption expenditure.

Fiscal stimulus with imperfect expectations: Spending vs. tax policy

The study aimed to know the internal deficit (the general budget) and its relationship to the external deficit (the trade balance) statistically significant between the general budget deficit and the trade balance deficit in Sudan during the period 2000-2022. There is also a one –way causal relationship that goes from the general budget deficit to the trade balance in Sudan during the study period . the study used the descriptive approach to deficit concepts related to the general budget deficit ,the trade balance and theories .explaining the deficit and the quantitative approach was used to build a standard model the measure and analyze the relationship between the general budget deficit ,and the results of the study showed matching the Keynesian point of view with the existence of a causal relationship in two directions that goes from the budget deficit to the trade balance deficit and vice versa , and the rejection of the Ricardian equivalence hypothesis that says there is no relationship between the two deficits.

This article examines the validity of Ricardian equivalence theory in Benin over the period 1980 to 2020. The study uses a time series with the Autoregressive Long-Lived Regressions (ARDL) model. The results show that budget deficit financing has a positive effect on household consumption in the short term, and a negative effect in the long term. On the other hand, budget deficit financing has a positive effect on gross domestic product in the short term and no significant effect in the long term. These results suggest that budget deficit financing has different short- and long-term effects on economic well-being in Benin. Consequently, policymakers should consider complementary strategies to support long-term economic growth and ensure the sustainability of fiscal policies.

Using budget deficit to grow real gross domestic product (RGDP) is an issue of perpetual economic debate with different theoretical traditions reaching divergent conclusions. Nepal has always had a budget deficit in its modern history, and the role of this deficit in the economy has not been adequately studied. This paper studies how the budget deficit affected economic growth in both short and long periods using the ARDL approach to the bound test. The paper shows that budget deficit positively impacts RGDP in the short-run, i.e., crowding-in effect as described by Keynesian tradition, but has no effect in the long-term supporting the Ricardian equivalence hypothesis. Further, the results show that exports are largely detached from the long-run RGDP despite having a role in short-run economic performance. Private gross capital formation is also important in short and long horizons.

Abstract This paper investigates the Ricardian Equivalence (RE) under collateralized debt, default, transaction costs and incomplete markets. The public debt is neutral and the RE holds only if the collateral-transfer cost depends linearly on the lump-sum tax and is fully offset. Lenders and borrowers should enter in a voluntary agreement to compensate for any transfer cost under default. However, any perturbation in the assumed affine relation undermines the debt neutrality. It is not the transaction cost per se that invalidates the RE, but rather how this cost affects the households’ indebtedness and budget constraint. The underlying mechanism is the credit channel of the fiscal policy. Whenever the transfer cost is not fully offset, there is a net tax balance leftover that affects the budget set and real allocations. This is fundamentally different from a liquidity constrained economy because the credit channel of the fiscal policy is binding and uncompensated transaction costs lead to the RE failure.

We study the Ricardian Equivalence Theorem in the presence of a reserve requirement. Banks pay depositors the deposit rate and receive the borrowing rate on loans. Equivalence fails because the reserve requirement drives a wedge between the deposit and borrowing rates implying that government faces a different intertemporal tradeoff than savers. A tax cut financed by an increase in government debt causes an increase in savings but only increases the supply of loanable funds by a fraction because of the reserve requirement. This causes interest rates to rise and consumption to fall. We also show that if the central bank pays interest on reserves at the borrowing rate, the various rates are equal, however, equivalence still fails. The reason is that future taxes to pay down the debt must be higher for the central bank to pay interest and consumption will fall in response.

Abstract We study the importance of planning horizons for fiscal multipliers in a New‐Keynesian model with bounded rationality. We show that, when agents have shorter planning horizons, government spending multipliers are smaller, whereas labor tax cut multipliers are larger. Furthermore, Ricardian equivalence breaks down, and transfer shocks feature a negative multiplier. Results are driven by the cognitive limitations of finite planning horizons that lead agent's expectations to deviate from the fully rational benchmark. We find larger investment responses, which are more in line with empirical findings than those of models with longer planning horizons, rule‐of‐thumb households, or a Blanchard–Yaari structure.

Abstract This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or “sparse,” model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of some of the canonical models in macroeconomics and finance. In the life-cycle model, the agent initially does not pay much attention to retirement and undersaves; late in life, he progressively saves more, generating realistic dynamics. In the consumption-savings model, the consumer decides to pay little or no attention to the interest rate and more attention to his income. Ricardian equivalence and the Lucas critique partially fail because the consumer may not pay full attention to taxes and policy changes. In a Merton-style dynamic portfolio choice problem, the agent endogenously pays limited or no attention to the varying equity premium and hedging demand terms. Finally, in the neoclassical growth model, agents act on a simplified model of the macroeconomy; in equilibrium, fluctuations are larger and more persistent.