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Unexpected Consequences of Ricardian Expectations

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  • Schlicht, Ekkehart

Abstract

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 invalidated. 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.

Suggested Citation

  • Schlicht, Ekkehart, 2013. "Unexpected Consequences of Ricardian Expectations," Discussion Papers in Economics 14847, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:14847
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    References listed on IDEAS

    as
    1. Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy (IfW).
    2. Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    4. Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy (IfW).
    5. Schlicht, Ekkehart, 2004. "Public Debt as Private Wealth," Discussion Papers in Economics 371, University of Munich, Department of Economics.
    6. 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.
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    Cited by:

    1. Ekkehart Schlicht, 2014. "Unexpected Consequences of Ricardian Expectations—Erratum," Metroeconomica, Wiley Blackwell, vol. 65(1), pages 191-194, February.

    More about this item

    Keywords

    Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations; Ricardian expectations; Barro expectations; tax neutrality;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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