An Empirical Analysis of Ricardian Equivalence on Real Exchange Rate and Current Account: Korea

This paper investigates the responses of real exchange rate and current account as well as consumption in a small open economy to fiscal policies using an alternative time horizon model. Cointegration tests present that there is no stable relationship between the fiscal variables and the real exchange rate, current account, or consumption. The maximum likelihood estimation suggests that fiscal policies seem not to be much effective as the conventional or finite horizon model predicts. REP with infinite horizons seems to be more conceivable to explaining the fluctuation of consumption, real exchange rate, and current account in Korea. [F31, F32]