Ricardian equivalence revisited: Deficits, gifts and bequests

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.