Government Debt, Life-Cycle Income and Liquidity Constrains: Beyond Approximate Ricardian Equivalence

Steven Symansky, Douglas Laxton and Hamid Faruqee

No 1996/140, IMF Working Papers from International Monetary Fund

Abstract: Evans (1991) has demonstrated that Blanchard’s (1985) finite-horizon model obeys approximate Ricardian equivalence. We show that this result is determined largely by an unrealistic assumption that labor income grows monotonically over a consumer’s entire lifetime. Introducing more realistic lifetime earnings profiles, we find that the effects of government debt on the real interest rate and the capital stock become considerably larger. In particular, leaving aside the effects of distortionary capital taxation, the extended model with liquidity constraints predicts that real interest rates would decline by about 150-200 basis points if government debt were eliminated completely in all OECD countries.

Keywords: WP; real interest rate; capital stock; Ricardian Equivalence; Crowding Out; Real Interest Rates; Government Debt; Blanchard model; income profile; consumption function; real rate of interest; debt ratio; life-cycle income; income consumer; debt issue; debt buildup; debt accumulation; income hypothesis; Income; Consumption; Disposable income (search for similar items in EconPapers)
Pages: 30
Date: 1996-12-01
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Citations: View citations in EconPapers (16)

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Journal Article: Government Debt, Life-Cycle Income, and Liquidity Constraints: Beyond Approximate Ricardian Equivalence (1997)
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