To what extent are public savings offset by private savings in the OECD

Abstract

The substitutability of private and public savings has implications for the effectiveness of fiscal policy. Using annual data for the period 1970–2004, this study re-examines long-run relationships between OECD private and public savings rates. However, unlike previous work, panel data unit root and cointegration tests are employed. The results confirm substitutability where strong Ricardian Equivalence is rejected for the entire OECD panel. There is support for weak Ricardian Equivalence with less than perfect substitutability. Indeed, it is argued that existing studies most likely overstate the extent of long-run substitutability particularly with regard to EU countries.