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Unexpected Consequences of Ricardian Expectations

Ekkehart Schlicht ()

Discussion Papers in Economics from University of Munich, Department of Economics

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.

Keywords: Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations; Ricardian expectations; Barro expectations (search for similar items in EconPapers)
JEL-codes: E2 E12 E6 H6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2012-07
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Journal Article: Unexpected Consequences of Ricardian Expectations (2013) Downloads
Working Paper: A Case Where Barro Expectations Are Not Rational (2012) Downloads
Working Paper: A case where Barro expectations are not rational (2012) Downloads
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