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Does Ricardian Equivalence Hold When Expectations are not Rational?

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  • George W. Evans

    ()
    (University of Oregon Economics Department and University of St. Andrews)

  • Seppo Honkapohja

    ()
    (Bank of Finland, Helsinki, Finland
    University of St. Andrews)

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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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2010-3.

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Length: 28
Date of creation: 04 Aug 2010
Date of revision:
Handle: RePEc:ore:uoecwp:2010-3

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

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  1. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  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. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  4. 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.
  5. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  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. Gasteiger, Emanuel & Zhang, Shoujian, 2011. "Anticipation, learning and welfare: the case of distortionary taxation," MPRA Paper 30625, University Library of Munich, Germany.
  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. Mitra , Kaushik & Evans , George W. & Honkapohja , Seppo, 2011. "Policy change and learning in the RBC model," Research Discussion Papers 22/2011, Bank of Finland.
  4. Evans, George W. & Mitra, Kaushik, 2013. "E-stability in the stochastic Ramsey model," Economics Letters, Elsevier, vol. 118(2), pages 407-410.
  5. Stefano Eusepi & Bruce Preston, 2013. "Fiscal foundations of inflation: imperfect knowledge," Staff Reports 649, Federal Reserve Bank of New York.
  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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