Examining Ricardian Equivalence by estimating and bootstrapping a nonlinear dynamic panel model

We examine the Ricardian Equivalence proposition for a panel of OECD countries in the 80s and 90s by estimating a nonlinear dynamic consumption function. We estimate this function with the Generalized Method of Moments (GMM) using moment conditions that allow us to use information from the levels of the variables included in the consumption function. To examine the performance of this nonlinear GMM estimator and to obtain small sample critical values for the test statistics we apply both one-level and two-level bootstraps. Ricardian Equivalence is rejected since we find a significant number of current income consumers and since permanent income consumers seem to consume less in each period than what would be expected under certainty equivalence.

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