The Effect of Budgetary Deficit on Saving in Iranian Economy: Testing the Ricardian Equivalence

In economic theories, the effects of Government's normative, stabilizing and allocative policies on economic objective variables and achieving their desired levels are usually accompanied with budgetary adjustments. This necessitates the study of the inevitable role of Government in the economy especially through its budget and its effects on economic variables of prime significance. Households and firm's economic activities at macro-level take place in the form of consumption/saving and investment. One of the significant outcome of analyzing the relationship of these activities with Government budget is the clarification of economic relationship of the Government with the public and different sections of the public with each other. The theoretical foundation of studying the effect of budget, especially the budgetary deficit, on the behaviour of consumption and saving are the standard Keynesian approach and the Ricardian equivalence approach. After explaining these two approaches, the paper attempts to explain the effect of budgetary deficit on saving in Iranian economy during the period of 1342-1383 using the Ricardian equivalence approach as well as the descriptive and inference approaches. The results show the negative effect of budgetary deficit on consumption, hence the rejection of Keynesian approach. In addition, the effect of budgetary deficit on saving is found to be positive and statistically significant, which confirms the existence of the Ricardian equivalence in Iranian economy.