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Unexpected Consequences of Ricardian Expectations

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  • Schlicht, Ekkehart

Abstract

Economists are widely familiar with the Ricardian equivalence thesis. It maintains that, given the time-path of government spending, a change in taxation does not alter the set of feasible life-time consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. In this note a surprising finding is established. Assuming that the agents in a standard infinite horizon growth model hold the very expectations the thesis proposes (“Ricardian expectations”), it is shown that these expectations are disappointed. This divergence from the Ricardian equivalence thesis is traced to the omission of interest payments on public debt as part of the households' disposable income. The non-equivalence is valid in a wide class of models. Further it is shown that a permanent deficit policy does not imply a violation of the government's budget constraint at any point of time in the future.

Suggested Citation

  • Schlicht, Ekkehart, 2012. "Unexpected Consequences of Ricardian Expectations," Discussion Papers in Economics 13794, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:13794
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    References listed on IDEAS

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    Cited by:

    1. Ekkehart Schlicht, 2013. "Unexpected Consequences of Ricardian Expectations," Metroeconomica, Wiley Blackwell, vol. 64(3), pages 498-512, July.
    2. Ekkehart Schlicht, 2014. "Unexpected Consequences of Ricardian Expectations—Erratum," Metroeconomica, Wiley Blackwell, vol. 65(1), pages 191-194, February.
    3. Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy (IfW Kiel).
    4. Wolfgang Kuhle, 2014. "The Optimal Structure for Public Debt," Metroeconomica, Wiley Blackwell, vol. 65(2), pages 321-348, May.
    5. repec:lmu:muenar:14673 is not listed on IDEAS

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    More about this item

    Keywords

    Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations; Ricardian expectations; Barro expectations;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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