What is Ricardian Equivalence Hypothesis

The effects of the government investments and private sector investments on the production, is an important academic argument subject between the Neo-classical school and the Keynesian school. Subject to the financing way of the government sector investments, accruing possibility of private sector investments decreases and crowding-out effect occurs with the behaviours of government sector which restricting the investment area of private sector or changing the investments plans. On the other hand Keynesian economist suggest that the economy is not always in the full employment level. By the hand of Keynesian multiplier mechanism which is increasing the public expenditures and decreasing the taxes, private sector would enhance its investments and crowding-in effect occurs. In this study, we aimed to test the existence of crowding out/in effects of the public sector investments on the private investments in the European Union and a candidate country Turkey with the panel causality tests, over the period 1970-2014.