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How Rival Are the Ricardian Equivalence Proposition and the Fiscal Policy Potency View?

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  • Dalamagas, Basil A

Abstract

Substitution of debt for taxes as a means of financing a given path of government expenditure would, according to the Ricardian equivalence proposition, have no important real consequences; yet it could, according to the traditional Keynesian view, have desirable countercyclical and growth effects. A reconciliation of these opposing views is not impossible if the author illuminates a source of deviation from the equivalence theorem, which has not been explored so far: the possibility that consumption decisions in each country are affected by the level of its indebtedness, when private agents operate under a debt illusion. The paper finds, within an explicit intertemporal optimization framework, strong empirical support for the debt-illusion hypothesis in a large sample of 52 countries. Copyright 1992 by Scottish Economic Society.

Suggested Citation

  • Dalamagas, Basil A, 1992. "How Rival Are the Ricardian Equivalence Proposition and the Fiscal Policy Potency View?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(4), pages 457-476, November.
  • Handle: RePEc:bla:scotjp:v:39:y:1992:i:4:p:457-76
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    Cited by:

    1. António Afonso, 2008. "Euler testing Ricardo and Barro in the EU," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-14.
    2. Gianluigi Giorgioni & Ken Holden, 2003. "Ricardian equivalence, expansionary fiscal contraction and the stock market: a VECM approach," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1435-1443.
    3. Tomas Wroblowsky, 2007. "Explaining the Variability of Debt Neutrality Tests Results: A Meta-Analysis of Ricardian Equivalence," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 5(1), pages 7-24.
    4. repec:ebl:ecbull:v:5:y:2008:i:16:p:1-14 is not listed on IDEAS
    5. António Afonso, 2001. "Government indebtedness and european consumers behaviour," Working Papers Department of Economics 2001/12, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    6. Roberto Dell'Anno & Vincenzo Maria De Rosa, 2013. "The Relevance of the Theory of Fiscal Illusion. The Case of the Italian Tax System," HISTORY OF ECONOMIC THOUGHT AND POLICY, FrancoAngeli Editore, vol. 2013(2), pages 63-92.
    7. T. D. Stanley, 2001. "Wheat from Chaff: Meta-analysis as Quantitative Literature Review," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 131-150, Summer.

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