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Does Ricardian Equivalence Hold When Expectations are not Rational?

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  • Evans, George W.
  • Honkapohja, Seppo
  • Mitra, Kaushik

Abstract

This paper shows that the Ricardian Equivalence proposition can continue to hold when expectations are not rational and are instead formed using adaptive learning rules. In temporary equilibrium, with given expectations, Ricardian Equivalence holds under the standard conditions for its validity under rational expectations. Furthermore, Ricardian Equivalence holds for paths of temporary equilibria under learning provided suitable additional conditions on learning dynamics are satisfied. New cases of failure of the Ricardian proposition emerge under learning. Most importantly, agents' expectations must not depend on government's financial variables under deficit financing.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7792.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7792

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Keywords: expectations; Ramsey model; Ricardian equivalence; Taxation;

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References

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  1. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  2. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  3. 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.
  4. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, vol. 102(412), pages 588-97, May.
  5. Mitra, Kaushik & Evans, George W. & Honkapohja, Seppo, 2012. "Fiscal Policy and Learning," SIRE Discussion Papers 2012-10, Scottish Institute for Research in Economics (SIRE).
  6. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  7. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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Citations

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Cited by:
  1. Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.
  2. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2013. "The Effects of the Saving and Banking Glut on the U.S. Economy," Working Paper Series WP-2013-17, Federal Reserve Bank of Chicago, revised 29 Nov 2013.
  3. Bruce Preston, 2013. "Comment on "Dormant Shocks and Fiscal Virtue"," NBER Chapters, in: NBER Macroeconomics Annual 2013, Volume 28, pages 47-58 National Bureau of Economic Research, Inc.
  4. Gasteiger, Emanuel & Zhang, Shoujian, 2011. "Anticipation, learning and welfare: the case of distortionary taxation," MPRA Paper 30625, University Library of Munich, Germany.
  5. Stefano Eusepi & Bruce Preston, 2013. "Fiscal foundations of inflation: imperfect knowledge," Staff Reports 649, Federal Reserve Bank of New York.
  6. George W. Evans & Kaushik Mitra, 2012. "E-stability in the Stochastic Ramsey Model," CDMA Working Paper Series 201209, Centre for Dynamic Macroeconomic Analysis.
  7. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Policy Change and Learning in the RBC Model," CEPR Discussion Papers 8892, C.E.P.R. Discussion Papers.

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