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Budget deficits, public debt and the Ricardian Equivalence

Author

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  • Claudio Sardoni

    (Department of Social Sciences and Economics, Sapienza University of Rome)

Abstract

The paper criticizes the so-called Ricardian equivalence (RE) and its implications for the analysis of the problem of the public debt. It is argued that the validity of the RE hinges on an unsatisfactory view of the economic role of the state as a mere `parasite' and on an unwarranted extension of the micro-economic analysis of debts to the macro-economic level. When dealing with the problem of the ratio of the public debt to GDP, the acceptance of the RE translates into the assumption that the economy's rate of growth is independent of public spending, taxes and debt. On the grounds of the critique of the RE, the paper presents a differ- ent approach, based on the idea that an adequate composition of public spending can ensure a stable public debt ratio even though the government runs a primary deficit. According to such approach, public outlays should be mostly devoted to productive expenditures, i.e. those which a ect the equilibrium rate of growth thanks to their positive impact on overall productivity.

Suggested Citation

  • Claudio Sardoni, 2020. "Budget deficits, public debt and the Ricardian Equivalence," Working Papers 18/20, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:18/20
    as

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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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