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Does Ricardian Equivalence Hold When Expectations Are Not Rational?

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  • GEORGE W. EVANS
  • SEPPO HONKAPOHJA
  • KAUSHIK MITRA

Abstract

This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00531.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 7 (October)
Pages: 1259-1283

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:7:p:1259-1283

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Evans, George W & Honkapohja, Seppo, 1998. "Economic Dynamics with Learning: New Stability Results," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 23-44, January.
  2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  5. Martin Feldstein, 1980. "Government Deficits and Aggregate Demand," NBER Working Papers 0435, National Bureau of Economic Research, Inc.
  6. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  7. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, vol. 102(412), pages 588-97, May.
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Cited by:
  1. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2013. "The Effects of the Saving and Banking Glut on the U.S. Economy," NBER Chapters, in: NBER International Seminar on Macroeconomics 2013, pages 52-67 National Bureau of Economic Research, Inc.
  2. Emanuel Gasteiger & Shoujian Zhang, 2013. "Anticipation, Learning and Welfare: the Case of Distortionary Taxation," CDMA Working Paper Series 201301, Centre for Dynamic Macroeconomic Analysis.
  3. Stefano Eusepi & Bruce Preston, 2013. "Fiscal foundations of inflation: imperfect knowledge," Staff Reports 649, Federal Reserve Bank of New York.
  4. Evans, George W. & Mitra, Kaushik, 2013. "E-stability in the stochastic Ramsey model," Economics Letters, Elsevier, vol. 118(2), pages 407-410.
  5. Kaushik Mitra & George W. Evans & Seppo Honkapohja, 2011. "Policy Change and Learning in the RBC Model," CDMA Working Paper Series 201111, Centre for Dynamic Macroeconomic Analysis.
  6. Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.

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