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 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.
|Date of creation:||Apr 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstr. 28, 80539 Munich, Germany|
Web page: http://www.vwl.uni-muenchen.de
More information through EDIRC
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.:
- 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, 2012. "A Case Where Barro Expectations Are Not Rational," Discussion Papers in Economics 12715, University of Munich, Department of Economics.
- Schlicht, Ekkehart, 2008.
"Public Debt as Private Wealth,"
Discussion Papers in Economics
2143, University of Munich, Department of Economics.
- Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- 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.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:lmu:muenec:14847. 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: (Tamilla Benkelberg)
If references are entirely missing, you can add them using this form.