A Case Where Barro Expectations Are Not Rational
Ekkehart Schlicht ()
Discussion Papers in Economics from University of Munich, Department of Economics
This note generalizes Feldsteinâ€™s (1976) criticism of Barroâ€™s(1974) analysis 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 â€œBarro expectationsâ€ : 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.
Keywords: Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations (search for similar items in EconPapers)
JEL-codes: E2 E12 E6 H6 (search for similar items in EconPapers)
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Working Paper: A case where Barro expectations are not rational (2012)
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Persistent link: http://EconPapers.repec.org/RePEc:lmu:muenec:12715
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