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A Case Where Barro Expectations Are Not Rational

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  • Schlicht, Ekkehart

Abstract

This note generalizes Feldstein’s (1976) criticism of Barro’s(1974) analysis for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold “Barro expectations”: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 12715.

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Date of creation: Jan 2012
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Handle: RePEc:lmu:muenec:12715

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Keywords: Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations;

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  1. Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
  2. 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..
  3. Schlicht, Ekkehart, 2008. "Public Debt as Private Wealth," Munich Reprints in Economics 2143, University of Munich, Department of Economics.
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  1. repec:lmu:muenar:14673 is not listed on IDEAS
  2. Schlicht, Ekkehart, 2012. "Unexpected Consequences of Ricardian Expectations," Discussion Papers in Economics 13794, University of Munich, Department of Economics.

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