On equivalence.

This paper gauges the causal relationship between the external and budget de cits by using Blanchard's overlapping generations model. This model nests the twin de cits hypothesis (i.e. there is a positive relationship between the de cits) and the Ricardian equivalence hypothesis (i.e. there is no link between the de cits). This model also implies that consumers forecast future budget de cits by using (at least) the history of the two de cits. This implication is used to derive time series restrictions, which are testable for given consumers' planning horizons. For the relevant consumers' horizons, the response of the external de cit to an increase in the budget de cit is computed. Empirically, the relevant Canadian consumers' horizons (which can be long) and the persistence of the Canadian budget de cit produce responses that are statistically positive. In contrast, the relevant U.S. consumers' horizons (which can be long) and the dynamic behavior of the U.S. budget de cit yield responses that are statistically insigni cant.