Unexpected Consequences of Ricardian Expectations
Economists are widely familiar with the Ricardian equivalence thesis. It maintains that, given the time-path of government spending, a change in taxation does not alter the set of feasible life-time consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. In this note a surprising finding is established. Assuming that the agents in a standard infinite horizon growth model hold the very expectations the thesis proposes (“Ricardian expectations”), it is shown that these expectations are disappointed. This divergence from the Ricardian equivalence thesis is traced to the omission of interest payments on public debt as part of the households' disposable income. The non-equivalence is valid in a wide class of models. Further it is shown that a permanent deficit policy does not imply a violation of the government's budget constraint at any point of time in the future.
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- Ekkehart Schlicht, 2006.
"Public Debt As Private Wealth: Some Equilibrium Considerations,"
Wiley Blackwell, vol. 57(4), pages 494-520, November.
- Schlicht, Ekkehart, 2008.
"Public Debt as Private Wealth,"
Munich Reprints in Economics
2143, University of Munich, Department of Economics.
- Barro, Robert J., 1979.
"On the Determination of the Public Debt,"
3451400, Harvard University 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 331-36, April.
- Schlicht, Ekkehart, 2012.
"A Case Where Barro Expectations Are Not Rational,"
Discussion Papers in Economics
12715, University of Munich, Department of Economics.
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