Debt neutrality: theory and evidence from developing countries
This paper reviews the Ricardian-Barro hypothesis and tests the basic postulate of the model for a sample of developing countries including Mexico and Venezuela. Two specifications are utilized, the first is based on the simple consumption model associated with the work of Kormendi (1983). The alternative is based on a model developed by Haque and Montiel (1987). The outcome of the two-stage least square estimation technique rejected the hypothesis in Mexico, Trinidad and Tobago and Venezuela, all countries, which underwent adjustment programmes. However these results were reversed when the alternative model was utilized due to liquidity constraint and possibly the Yaari-Blanchard effect. The contradictory outcome alludes to the sensitivity of the results to the model specified.