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Budget deficits, public debt and the Ricardian Equivalence

Claudio Sardoni ()

No 18/20, Working Papers from Sapienza University of Rome, DISS

Abstract: The paper criticizes the so-called Ricardian equivalence (RE) and its implications for the analysis of the problem of the public debt. It is argued that the validity of the RE hinges on an unsatisfactory view of the economic role of the state as a mere `parasite' and on an unwarranted extension of the micro-economic analysis of debts to the macro-economic level. When dealing with the problem of the ratio of the public debt to GDP, the acceptance of the RE translates into the assumption that the economy's rate of growth is independent of public spending, taxes and debt. On the grounds of the critique of the RE, the paper presents a differ- ent approach, based on the idea that an adequate composition of public spending can ensure a stable public debt ratio even though the government runs a primary deficit. According to such approach, public outlays should be mostly devoted to productive expenditures, i.e. those which a ect the equilibrium rate of growth thanks to their positive impact on overall productivity.

JEL-codes: E21 E60 E62 H30 H54 H60 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-mac and nep-pub
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