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Ricardian equivalence revisited: Deficits, gifts and bequests

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  • Barczyk, Daniel

Abstract

Barro (1974) shows that operative altruistic transfer motives are key for Ricardian equivalence to hold. This paper evaluates the importance of this mechanism quantitatively by studying deficit-financed tax cut experiments. I use a heterogeneous-agents overlapping-generations economy with endogenously operative transfer motives to capture the fact that empirically transfers occur in some but not in all families. Altruism is calibrated to match aggregate transfer statistics. I find that the response of aggregate consumption to a tax cut is in the ballpark of a standard overlapping-generations economy, that is, an economy without altruistic family links. Welfare implications of this economy, however, move closer to a dynastic economy.

Suggested Citation

  • Barczyk, Daniel, 2016. "Ricardian equivalence revisited: Deficits, gifts and bequests," Journal of Economic Dynamics and Control, Elsevier, vol. 63(C), pages 1-24.
  • Handle: RePEc:eee:dyncon:v:63:y:2016:i:c:p:1-24
    DOI: 10.1016/j.jedc.2015.11.004
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    More about this item

    Keywords

    Ricardian equivalence; Consumption response to tax cut; Interaction between government and private transfers;
    All these keywords.

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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