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Does Ricardian Equivalence Hold When Expectations are not Rational?

  • George W. Evans

    ()

    (University of Oregon Economics Department and University of St. Andrews)

  • Seppo Honkapohja

    ()

    (Bank of Finland, Helsinki, Finland
    University of St. Andrews)

This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2010-3.

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Length: 28
Date of creation: 04 Aug 2010
Date of revision:
Handle: RePEc:ore:uoecwp:2010-3
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  1. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, vol. 102(412), pages 588-97, May.
  2. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  3. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  4. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Mitra, Kaushik & Evans, George W. & Honkapohja , Seppo, 2012. "Fiscal policy and learning," Research Discussion Papers 5/2012, Bank of Finland.
  7. George W. Evans & Seppo Honkapohja, . "Economic Dynamics with Learning: New Stability Results," Computing in Economics and Finance 1997 51, Society for Computational Economics.
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
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