IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this book chapter

Ricardian Equivalence: An Evaluation of Theory and Evidence

In: NBER Macroeconomics Annual 1987, Volume 2

Author Info

Listed author(s):
  • B. Douglas Bernheim

Abstract

In evaluating the existing theory and evidence on Ricardian equivalence, it is essential to distinguish between the short run effects of government borrowing (primarily the potential for stimulating aggregate demand) and the long run effects (primarily the potential for depressing capital accumulation). I argue that the theoretical case for long run neutrality is extremely weak, in that it depends upon improbable assumptions that are either directly or indirectly falsified through empirical observation. In contrast, the approximate validity of short run neutrality depends primarily upon assumptions that have at least an aura of plausibility. Nevertheless, even in this case behavioral evidence weighs heavily against the Ricardian view. Efforts to measure the economic effects of deficits directly through aggregate data confront a number of problems which, taken together, may well be insuperable. It is therefore not at all surprising that this evidence has, by itself, proven inconclusive. Overall, the existing body of theory and evidence establishes a significant likelihood that deficits have large effects on current consumption, and there is good reason to believe that this would drive up interest rates. In addition, I find a complete lack of either evidence or coherent theoretical argument to dispute the view that sustained deficits significantly depress capital accumulation in the long run.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/chapters/c11103.pdf
Download Restriction: no

as
in new window

This chapter was published in:
  • Stanley Fischer, 1987. "NBER Macroeconomics Annual 1987, Volume 2," NBER Books, National Bureau of Economic Research, Inc, number fisc87-1, Enero-Jun.
    • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11103.
    Handle: RePEc:nbr:nberch:11103
    Contact details of provider: Postal:
    National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

    Phone: 617-868-3900
    Web page: http://www.nber.org
    Email:


    More information through EDIRC

    Keywords:

    Other versions of this item:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-1093, Nov.-Dec..
    2. Reid, Bradford G, 1985. "Aggregate Consumption and Deficit Financing: An Attempt to Separate Permanent from Transitory Effects," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 475-486, July.
    3. Burbidge, John B, 1983. "Government Debt in an Overlapping-Generations Model with Bequests and Gifts," American Economic Review, American Economic Association, vol. 73(1), pages 222-227, March.
    4. Kimball, Miles S., 1987. "Making sense of two-sided altruism," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 301-326, September.
    5. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 561-577, June.
    6. Evans, Paul, 1986. "Is the dollar high because of large budget deficits?," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 227-249, November.
    7. Tomes, Nigel, 1981. "The Family, Inheritance, and the Intergenerational Transmission of Inequality," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 928-958, October.
    8. Laitner, John P, 1979. "Bequests, Golden-age Capital Accumulation and Government Debt," Economica, London School of Economics and Political Science, vol. 46(184), pages 403-414, November.
    9. Poterba, James M. & Summers, Lawrence H., 1987. "Finite lifetimes and the effects of budget deficits on national saving," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 369-391, September.
    10. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-391, April.
    11. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February.
    12. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-127, March.
    13. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-338, April.
    14. James D. Adams, 1980. "Personal Wealth Transfers," The Quarterly Journal of Economics, Oxford University Press, vol. 95(1), pages 159-179.
    15. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
    16. Boskin, Michael J, 1982. "Federal Government Deficits: Some Myths and Realities," American Economic Review, American Economic Association, vol. 72(2), pages 296-303, May.
    17. Mervyn A. King, 1983. "The Economics of Saving," NBER Working Papers 1247, National Bureau of Economic Research, Inc.
    18. Kingston, Geoffrey H., 1984. "Efficient timing of income taxes," Journal of Public Economics, Elsevier, vol. 24(2), pages 271-280, July.
    19. Plosser, Charles I., 1982. "Government financing decisions and asset returns," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 325-352.
    20. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    21. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1986. "The Strategic Bequest Motive," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 151-182, July.
    22. Kormendi, Roger C & Meguire, Philip G, 1995. "Government Debt, Government Spending, and Private-Sector Behavior: Reply," American Economic Review, American Economic Association, vol. 85(5), pages 1357-1361, December.
    23. Prescott, Edward C., 1977. "Should control theory be used for economic stabilization?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 7(1), pages 13-38, January.
    24. Joseph E. Stiglitz, 1983. "On the Relevance or Irrelevance of Public Financial Policy," NBER Working Papers 1057, National Bureau of Economic Research, Inc.
    25. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-516, June.
    26. Barth, James R & Iden, George & Russek, Frank S, 1986. "Government Debt, Government Spending, and Private Sector Behavior: Comment," American Economic Review, American Economic Association, vol. 76(5), pages 1158-1167, December.
    27. Martin S. Feldstein, 1986. "The Budget Deficit and the Dollar," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 355-409 National Bureau of Economic Research, Inc.
    28. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    29. Wildasin, David E, 1990. "Non-neutrality of Debt with Endogenous Fertility," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 414-428, April.
    30. Leimer, Dean R & Lesnoy, Selig D, 1982. "Social Security and Private Saving: New Time-Series Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 606-629, June.
    31. Chan, Louis Kuo Chi, 1983. "Uncertainty and the neutrality of government financing policy," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 351-372.
    32. Barro, Robert J. & MacDonald, Glenn M., 1979. "Social security and consumer spending in an international cross section," Journal of Public Economics, Elsevier, vol. 11(3), pages 275-289, June.
    33. Eytan Sheshinski & Yoram Weiss, 1981. "Uncertainty and Optimal Social Security Systems," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 189-206.
    34. Feldstein, Martin, 1988. "The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence," American Economic Review, American Economic Association, vol. 78(1), pages 14-23, March.
    35. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
    36. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    37. Seater, John J, 1982. "Are Future Taxes Discounted?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 376-389, August.
    38. Laurence J. Kotlikoff, 1986. "Is Debt Neutral in the Life Cycle Model?," NBER Working Papers 2053, National Bureau of Economic Research, Inc.
    39. Gary S. Becker & Robert J. Barro, 1988. "A Reformulation of the Economic Theory of Fertility," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 1-25.
    40. Ray, Debraj, 1987. "Nonpaternalistic intergenerational altruism," Journal of Economic Theory, Elsevier, vol. 41(1), pages 112-132, February.
    41. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
    42. R. W. Hafer & Scott E. Hein, 1982. "Financial innovations and the interest elasticity of money demand: some historical evidence," Working Papers 1982-011, Federal Reserve Bank of St. Louis.
    43. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    44. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
    45. Seater, John J. & Mariano, Roberto S., 1985. "New tests of the life cycle and tax discounting hypotheses," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 195-215, March.
    46. Dwyer, Gerald P, Jr, 1982. "Inflation and Government Deficits," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 315-329, July.
    47. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1156-1157, December.
    48. Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as
    in new window


    Cited by:
    This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:11103. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.