Failure of the Ricardian Equivalence Theory in Economies with Incomplete Markets
Jose Angelo Divino () and
Jaime Orrillo ()
Brazilian Review of Econometrics, 2017, vol. 37, issue 1
We investigate whether or not the Ricardian Equivalence Theorem (RET) holds in a naive economy with incomplete financial markets. Even in this artificially favorable environment, where public debt has a perfect substitute, the RET fails if we allow the payoff matrix to vary. For the RET to hold, we need to assume that the risk-free payoff belongs to the asset span of the economy and the law of one price is valid. Given that these are strong assumptions, we show that the failure of the RET is robust, in the sense that there exists an open set of payoff matrices such that the RET fails.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:sbe:breart:v:37:y:2017:i:1:a:56924
Access Statistics for this article
Brazilian Review of Econometrics is currently edited by Daniel Monte
More articles in Brazilian Review of Econometrics from Sociedade Brasileira de Econometria - SBE Contact information at EDIRC.
Bibliographic data for series maintained by Núcleo de Computação da FGV EPGE ().