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Does Ricardian Equivalence Hold When Expectations are not Rational?

Listed author(s):
  • George W. Evans
  • Seppo Honkapohja
  • Kaushik Mitra

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 satis?fied. 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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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp1008.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201008.

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Date of creation: 15 Apr 2010
Handle: RePEc:san:cdmawp:1008
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  1. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
  2. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695, December.
  3. George W. Evans & Seppo Honkapohja, 2008. "Learning and Macroeconomics," University of Oregon Economics Department Working Papers 2008-3, University of Oregon Economics Department.
  4. James B. Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Thomas J. Sargent, 2008. "Evolution and Intelligent Design," American Economic Review, American Economic Association, vol. 98(1), pages 5-37, March.
  7. John C. Williams & Athanasios Orphanides, 2004. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations," Computing in Economics and Finance 2004 144, Society for Computational Economics.
  8. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc.
  9. Thomas J. Sargent & Noah Williams & Tao Zha, 2004. "Shocks and government beliefs: the rise and fall of American inflation," FRB Atlanta Working Paper 2004-22, Federal Reserve Bank of Atlanta.
  10. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper 2003-18, Federal Reserve Bank of Atlanta.
  11. Jonathan Heathcote, 2003. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers gueconwpa~03-03-23, Georgetown University, Department of Economics.
  12. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, vol. 102(412), pages 588-597, May.
  13. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2009. "Anticipated fiscal policy and adaptive learning," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 930-953, October.
  14. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
  15. George W. Evans & Seppo Honkapohja, "undated". "Economic Dynamics with Learning: New Stability Results," Computing in Economics and Finance 1997 51, Society for Computational Economics.
  16. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  17. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x.
  18. James B. Bullard & Stefano Eusepi, 2003. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," FRB Atlanta Working Paper 2003-20, Federal Reserve Bank of Atlanta.
  19. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834.
  20. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
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