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This paper represents an attempt to assess the relevance of Ricardian Equivalence in Iran. The hypothesis may be interpreted as a generalisation to the short and the long run of the theories which put no weight on the real effects of public policies on aggregate demand. The tests are based on reduced-form consumption functions and on the Euler equation approach. According to the Ricardian Equivalence theorem prediction, our empirical finding show that government borrowing in Iran leads to an increase in household savings. However, the increased private savings do not completely offset increased government debt. In other words, contrary to the Ricardian Equivalence theorem, households to some extent perceive government debts as net wealth and consequently increased their consumption.
The paper’s results indicate that it would be wise to reject the Ricardian Equivalence hypothesis in Iran. This behaviour can be thought as being the result of liquidity constraints faced by households and also myopic behaviour due to uncertainty regarding the future path of taxes.