A Case Where Barro Expectations Are Not Rational
This note generalizes Feldstein’s (1976) criticism of Barro’s(1974) analysis for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold “Barro expectations”: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations.
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- Ekkehart Schlicht, 2006.
"Public Debt As Private Wealth: Some Equilibrium Considerations,"
Wiley Blackwell, vol. 57(4), pages 494-520, November.
- Barro, Robert J., 1979.
"On the Determination of the Public Debt,"
3451400, Harvard University Department of Economics.
- Schlicht, Ekkehart, 2012.
"A Case Where Barro Expectations Are Not Rational,"
Discussion Papers in Economics
12715, University of Munich, Department of Economics.
- Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy (IfW).
- Schlicht, Ekkehart, 2012. "Unexpected Consequences of Ricardian Expectations," Discussion Papers in Economics 13794, University of Munich, Department of Economics.
- Schlicht, Ekkehart, 2008.
"Public Debt as Private Wealth,"
Munich Reprints in Economics
2143, University of Munich, Department of Economics.
- Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-336, April.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
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