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Does Ricardian Equivalence hold when expectations are not rational?

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Author Info

  • Evans , George W

    (University of Oregon, University of St Andrews)

  • Honkapohja , Seppo

    (Bank of Finland)

  • Mitra, Kaushik

    ()
    (University of St Andrews)

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 financial variables under deficit financing.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 13/2010.

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Length: 26 pages
Date of creation: 05 May 2010
Date of revision:
Handle: RePEc:hhs:bofrdp:2010_013

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: taxation; expectations; Ramsey model; Ricardian Equivalence;

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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. 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, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
  5. 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.
  6. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, vol. 102(412), pages 588-97, May.
  7. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
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Cited by:
  1. Gasteiger, Emanuel & Zhang, Shoujian, 2011. "Anticipation, learning and welfare: the case of distortionary taxation," MPRA Paper 30625, University Library of Munich, Germany.
  2. Mitra , Kaushik & Evans , George W. & Honkapohja , Seppo, 2011. "Policy change and learning in the RBC model," Research Discussion Papers 22/2011, Bank of Finland.
  3. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2013. "The Effects of the Saving and Banking Glut on the U.S. Economy," NBER Working Papers 19635, National Bureau of Economic Research, Inc.
  4. Stefano Eusepi & Bruce Preston, 2013. "Fiscal foundations of inflation: imperfect knowledge," Staff Reports 649, Federal Reserve Bank of New York.
  5. Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.
  6. Evans, George W. & Mitra, Kaushik, 2013. "E-stability in the stochastic Ramsey model," Economics Letters, Elsevier, vol. 118(2), pages 407-410.

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