Ricardian equivalence: an empirical application to the Japanese economy

On the research of the economic effects of national debt, the Ricardo equivalence proposition(REP) is definitely the core issue and has been brought far-reaching influences as well. The REP has a very important policy implication, that is, the government debt failed to bring any changes of the aggregate social demand, and hence no changes to the national income either. To say it more clearly, if the REP holds, the expansionary fiscal policies taken through issuing national debt will be invalid, otherwise, they will be valid. This paper will comprehensively use both the direct method by testing the conclusion of REP and indirect method through Euler equation approach by testing the theoretical requirements of REP. Finally the paper comes to the conclusion that the REP is invalid in post-war Japanese economy.