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Liquidity Constraints and the Ricardian Equivalence Theorem: A Note

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  • Hayford, Marc

Abstract

In Fumio Hayashi's 1987 model of consumption under imperfect capital markets, the Ricardian equivalence theorem holds. This paper shows that Hayashi's result depends on the creditor receiving a positive partial payment when the debtor chooses to default. The specification of a positive partial payment to the creditor when the debtor defaults is inconsistent with evidence on personal bankruptcies. Under the more empirically plausible specification that the creditor may receive nothing if the debtor defaults, the analysis shows the Ricardian equivalence theorem does not hold. Copyright 1989 by Ohio State University Press.

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  • Hayford, Marc, 1989. "Liquidity Constraints and the Ricardian Equivalence Theorem: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 380-387, August.
    • Handle: RePEc:mcb:jmoncb:v:21:y:1989:i:3:p:380-87
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    Cited by:

    1. Bernd Hayo & Florian Neumeier, 2017. "Public Attitudes toward Fiscal Consolidation: Evidence from a Representative German Population Survey," Kyklos, Wiley Blackwell, vol. 70(1), pages 42-69, February.
    2. Hayo, Bernd & Neumeier, Florian, 2017. "The (In)validity of the Ricardian equivalence theorem–findings from a representative German population survey," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 162-174.
    3. Bernd Hayo & Florian Neumeier, 2016. "The debt brake in the eyes of the German population," International Economics and Economic Policy, Springer, vol. 13(1), pages 139-159, January.
    4. Duane Rockerbie, 1997. "Are consumers Ricardian when some are liquidity constrained? Evidence for the United States," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 821-827.
    5. Divino, José Angelo & Orrillo, Jaime, 2017. "Failure of the Ricardian Equivalence Theory in Economies with Incomplete Markets," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(1), May.
    6. Kostiainen, Seppo & Starck, Christian, 1990. "Does government and corporate saving influence household saving in Finland?," Bank of Finland Research Discussion Papers 27/1990, Bank of Finland.
    7. Friedrich Heinemann, 2010. "Eine Gabe an St. Nimmerlein?– Zur zeitlichen Dimension der Schuldenbremse," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(3), pages 246-259, August.
    8. Jose Angelo Divino & Jaime Orrillo, 2022. "Robust effects of a debt-financed tax cut in an economy with incomplete markets," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(1), pages 191-200, February.
    9. Eunji Kim & Yoonhee Ha & Sangheon Kim, 2017. "Public Debt, Corruption and Sustainable Economic Growth," Sustainability, MDPI, vol. 9(3), pages 1-30, March.

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