Ricardian Equivalence: An Evaluation of Theory and Evidence

B. Douglas Bernheim

No 2330, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In evaluating the existing theory and evidence on Ricardian equivalence, it is essential to distinguish between the short run effects of government borrowing (primarily the potential for stimulating aggregate demand) and the long run effects (primarily the potential for depressing capital accumulation). I argue that the theoretical case for long run neutrality is extremely weak, in that it depends upon improbable assumptions that are either directly or indirectly falsified through empirical observation. In contrast, the approximate validity of short run neutrality depends primarily upon assumptions that have at least an aura of plausibility. Nevertheless, even in this case behavioral evidence weighs heavily against the Ricardian view. Efforts to measure the economic effects of deficits directly through aggregate data confront a number of problems which, taken together, may well be insuperable. It is therefore not at all surprising that this evidence has, by itself, proven inconclusive. Overall, the existing body of theory and evidence establishes a significant likelihood that deficits have large effects on current consumption, and there is good reason to believe that this would drive up interest rates. In addition, I find a complete lack of either evidence or coherent theoretical argument to dispute the view that sustained deficits significantly depress capital accumulation in the long run.

Date: 1987-07
Note: PE
References: Add references at CitEc
Citations: View citations in EconPapers (187)

Published as Reprinted in Lakis C. Kaounides and Geoffrey E. Wood (eds.) Debt and Deficits, Edward Elgar Publishing Ltd: London, 1992
Published as Ricardian Equivalence: An Evaluation of Theory and Evidence , B. Douglas Bernheim. in NBER Macroeconomics Annual 1987, Volume 2 , Fischer. 1987

Downloads: (external link)
http://www.nber.org/papers/w2330.pdf (application/pdf)

Related works:
Chapter: Ricardian Equivalence: An Evaluation of Theory and Evidence (1987)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:2330

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2330

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().