DOES THE CONSTRAINT IN THE MATRIX OF LONG RUN EFFECTS BIAS THE RICARDIAN EQUIVALENCE TEST?

The purpose of this paper is to test the Ricardian Equivalence Hypothesis REH by estimating a SVAR model. In this framework, we separate the co-movements of saving rate and budget deficit rate into two shocks, associated with structural parameters, as if we were looking for ‘‘two needles in haystack’’. We avoid imposing formal short and long run constraints, because these may overestimate the compensation rate and bias the estimation of structural multipliers. Our results suggest that REH is applicable to Moroccan economy, since private saving compensates a large fraction i.e. 90% of the shock in budget deficit, which may handicap the economic development.