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The Ricardian Approach to Budget Deficits

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  • Robert J. Barro

Abstract

Persistent budget deficits have increased economists' interest in theories and evidence about fiscal policy. This paper develops the Ricardian approach and contrasts it with standard models. The discussion considers from major theoretical objections to Ricardian equivalence - finite lifetimes, imperfect capital markets, uncertainty about future taxes and incomes, and the distorting effects of taxation. The paper then considers empirical evidence on interest rates, consumption and saving, and current-account deficits. The conclusion is that the Ricardian approach is a useful first-order approximation, and that this approach will probably become the benchmark model for assessing fiscal policy.

Suggested Citation

  • Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Paper 728, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:728
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