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Testing Ricardian Equivalence under Uncertainty

Author

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  • Slate, Stephen
  • McKee, Michael
  • Beck, William
  • Alm, James

Abstract

This paper uses experimental methods to analyze Ricardian equivalence when the probability of debt retirement is less than one. The results suggest that the presence of outstanding debt and the probability of debt retirement have a strong influence on savings behavior. When the probability of debt retirement is low, consumption by the current generation increases, as predicted by Keynesian theory. However, as the probability of debt retirement increases, bequests rise to offset the future generation's expected repayment liability, and deficit spending becomes much less expansionary, as predicted by Ricardian theory. In general, the average bequest is significantly larger when an outstanding debt is passed on to the next generation than when no debt exists, regardless of the probability of debt retirement. However, as long as there is some uncertainty about debt repayment, the presence of debt always stimulates some additional consumption, so that strong variants of Ricardian equivalence are not found. Coauthors are Michael McKee, William Beck, and James Alm. Copyright 1995 by Kluwer Academic Publishers

Suggested Citation

  • Slate, Stephen & McKee, Michael & Beck, William & Alm, James, 1995. "Testing Ricardian Equivalence under Uncertainty," Public Choice, Springer, vol. 85(1-2), pages 11-29, October.
    • Handle: RePEc:kap:pubcho:v:85:y:1995:i:1-2:p:11-29
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    Cited by:

    1. Hayo, Bernd & Neumeier, Florian, 2017. "The (In)validity of the Ricardian equivalence theorem–findings from a representative German population survey," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 162-174.
    2. Meissner, Thomas & Rostam-Afschar, Davud, 2017. "Learning Ricardian Equivalence," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 273-288.
    3. Toshiaki Hiromitsu, 2019. "Consideration of keys to solving problems in long-term fiscal policy through laboratory research," International Journal of Economic Policy Studies, Springer, vol. 13(1), pages 147-172, January.
    4. L. Pozzi & F. Heylen & M. Dossche, 2002. "Government debt and the excess sensitivity of private consumption to current income: an empirical analysis for OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 02/155, Ghent University, Faculty of Economics and Business Administration.
    5. Geiger, Martin & Luhan, Wolfgang J. & Scharler, Johann, 2016. "When do fiscal consolidations lead to consumption booms? Lessons from a laboratory experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 1-20.
    6. Petr Frejlich & Helena Chytilová & Vojtěch Kotrba & Pavel Kotrba, 2023. "Experimentální ověření platnosti Barrovy-Ricardovy ekvivalence [Experimental Verification of Barro-Ricardo Equivalence Theorem]," Politická ekonomie, Prague University of Economics and Business, vol. 2023(4), pages 366-389.
    7. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Paper 334, Department of Economics, University of Pittsburgh, revised Jun 2014.
    8. Luigi Mittone & Matteo Tomaselli, 2019. "Economic Growth and Public Debt: An Experimental Approach in Search of a Confidence Channel," DEM Working Papers 2019/18, Department of Economics and Management.
    9. Roberto Tamborini & Matteo Tomaselli, 2020. "When does public debt impair economic growth? A literature review in search of a theory," DEM Working Papers 2020/7, Department of Economics and Management.

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