Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104376
Authors: 
Schlicht, Ekkehart
Year of Publication: 
2012
Series/Report no.: 
Munich Discussion Paper 2012-18
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. Further it is shown that a permanent deficit policy does not imply a violation of the government's budget constraint at any point of time in the future.
Subjects: 
Barro-Ricardo equivalence
Ricardian equivalence
fiscal policy
debt
taxation
rational expectations
Ricardian expectations
Barro expectations
JEL: 
E2
E12
E6
H6
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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