Does Ricardian Equivalence Hold When Expectations are Not Rational?

29 Pages Posted: 7 May 2010

See all articles by George W. Evans

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

Kaushik Mitra

University of St. Andrews - School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2010

Abstract

This paper shows that the Ricardian Equivalence proposition can continue to hold when expectations are not rational and are instead formed using adaptive learning rules. In temporary equilibrium, with given expectations, Ricardian Equivalence holds under the standard conditions for its validity under rational expectations. Furthermore, Ricardian Equivalence holds for paths of temporary equilibria under learning provided suitable additional conditions on learning dynamics are satisfied. New cases of failure of the Ricardian proposition emerge under learning. Most importantly, agents’ expectations must not depend on government financial variables under deficit financing.

Keywords: Taxation, Expectations, Ramsey Model, Ricardian Equivalence

JEL Classification: E62, D84, E21, E43

Suggested Citation

Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo and Mitra, Kaushik, Does Ricardian Equivalence Hold When Expectations are Not Rational? (May 5, 2010). Bank of Finland Research Discussion Paper No. 13/2010, Available at SSRN: https://ssrn.com/abstract=1601311 or http://dx.doi.org/10.2139/ssrn.1601311

George W. Evans

University of Oregon - Department of Economics ( email )

1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

Seppo Honkapohja

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

Kaushik Mitra (Contact Author)

University of St. Andrews - School of Economics and Finance ( email )

Castlecliffe
Saint Andrews, Fife KY16 9SS
United Kingdom

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