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Unexpected Consequences of Ricardian Expectations

By Ekkehart Schlicht

Abstract

Economists are widely familiar with the Ricardian equivalence thesis. It maintains that, given the time-path of government spending, a change in taxation does not alter the set of feasible life-time consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. In this note a surprising finding is established. Assuming that the agents in a standard infinite horizon growth model hold the very expectations the thesis proposes (“Ricardian expectations”), it is shown that these expectations are disappointed. This divergence from the Ricardian equivalence thesis is traced to the omission of interest payments on public debt as part of the households’ disposable income. The non-equivalence is valid in a wide class of models

Topics: Barro-Ricardo equivalence, Ricardian equivalence, fiscal policy, debt, taxation, rational expectations, Ricardian expectations, Barro expectations
Year: 2013
OAI identifier: oai:CiteSeerX.psu:10.1.1.353.1576
Provided by: CiteSeerX
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