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Does Ricardian Equivalence Hold When Expectations are not Rational?

  • 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
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Handle: RePEc:san:cdmawp:1008
Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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  1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  2. Mitra, Kaushik & Evans, George W. & Honkapohja, Seppo, 2012. "Fiscal Policy and Learning," SIRE Discussion Papers 2012-10, Scottish Institute for Research in Economics (SIRE).
  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  5. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  6. George W. Evans & Seppo Honkapohja, . "Economic Dynamics with Learning: New Stability Results," Computing in Economics and Finance 1997 51, Society for Computational Economics.
  7. Martin Feldstein, 1980. "Government Deficits and Aggregate Demand," NBER Working Papers 0435, National Bureau of Economic Research, Inc.
  8. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, vol. 102(412), pages 588-97, May.
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