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A case where Barro expectations are not rational

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  • Schlicht, Ekkehart

Abstract

The paper generalizes Feldstein's criticism (Perceived Wealth in Bonds and Social Security, 1976) of Barro's analysis (Are Government Bonds Real Net Wealth?, 1974) for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold Barro expectations: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations.

Suggested Citation

  • Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201213
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    References listed on IDEAS

    as
    1. 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..
    2. Schlicht, Ekkehart, 2012. "A Case Where Barro Expectations Are Not Rational," Discussion Papers in Economics 12715, University of Munich, Department of Economics.
    3. Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    5. Schlicht, Ekkehart, 2004. "Public Debt as Private Wealth," Discussion Papers in Economics 371, University of Munich, Department of Economics.
    6. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-336, April.
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    Citations

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    Cited by:

    1. Ekkehart Schlicht, 2013. "Unexpected Consequences of Ricardian Expectations," Metroeconomica, Wiley Blackwell, vol. 64(3), pages 498-512, July.
    2. Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy (IfW).
    3. repec:lmu:muenar:14673 is not listed on IDEAS

    More about this item

    Keywords

    Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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