A Case Where Barro Expectations are Not Rational

11 Pages Posted: 20 Feb 2012

See all articles by Ekkehart Schlicht

Ekkehart Schlicht

University of Munich - Department of Economics; IZA Institute of Labor Economics

Date Written: 2012

Abstract

The paper generalizes Feldstein's criticism (Perceived Wealth in Bonds and Social Security, 1976) of Barro's analysis (Are Government Bonds Real Net Wealth?, 1974) for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold Barro expectations: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations.

Keywords: Barro-Ricardo equivalence, Ricardian equivalence, fiscal policy, debt, taxation, rational expectations

JEL Classification: E2, E12, E6, H6

Suggested Citation

Schlicht, Ekkehart, A Case Where Barro Expectations are Not Rational (2012). Economics Discussion Paper No. 2012-13. Available at SSRN: https://ssrn.com/abstract=2007736 or http://dx.doi.org/10.2139/ssrn.2007736

Ekkehart Schlicht (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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