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Unexpected Consequences of Ricardian Expectations

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  • Schlicht, Ekkehart

Abstract

Economists are widely familiar with the Ricardian equivalence thesis. It maintains that, given the time-path of government spending, a change in taxation does not alter the set of feasible life-time consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. In this note a surprising finding is established. Assuming that the agents in a standard infinite horizon growth model hold the very expectations the thesis proposes (“Ricardian expectations”), it is shown that these expectations are disappointed. This divergence from the Ricardian equivalence thesis is traced to the omission of interest payments on public debt as part of the households' disposable income. The non-equivalence is valid in a wide class of models. Further it is shown that a permanent deficit policy does not imply a violation of the government's budget constraint at any point of time in the future.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 13794.

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Date of creation: Jul 2012
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Handle: RePEc:lmu:muenec:13794

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

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  1. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  2. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-36, April.
  3. Schlicht, Ekkehart, 2012. "A Case Where Barro Expectations Are Not Rational," Discussion Papers in Economics 12715, University of Munich, Department of Economics.
  4. Schlicht, Ekkehart, 2008. "Public Debt as Private Wealth," Discussion Papers in Economics 2143, University of Munich, Department of Economics.
  5. Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
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Cited by:
  1. Schlicht, Ekkehart, 2013. "Unexpected Consequences of Ricardian Expectations - Erratum," Discussion Papers in Economics 17249, University of Munich, Department of Economics.

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