Liquidity Constraints and the Ricardian Equivalence Theorem: A Note

Marc Hayford

Journal of Money, Credit and Banking, 1989, vol. 21, issue 3, 380-87

Abstract: In Fumio Hayashi's 1987 model of consumption under imperfect capital markets, the Ricardian equivalence theorem holds. This paper shows that Hayashi's result depends on the creditor receiving a positive partial payment when the debtor chooses to default. The specification of a positive partial payment to the creditor when the debtor defaults is inconsistent with evidence on personal bankruptcies. Under the more empirically plausible specification that the creditor may receive nothing if the debtor defaults, the analysis shows the Ricardian equivalence theorem does not hold. Copyright 1989 by Ohio State University Press.

Date: 1989
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:21:y:1989:i:3:p:380-87

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