Unexpected Consequences of Ricardian Expectations

15 Pages Posted: 6 Jun 2013

See all articles by Ekkehart Schlicht

Ekkehart Schlicht

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

Date Written: July 2013

Abstract

The Ricardian equivalence thesis maintains that, given the time‐path of government spending, a change in taxation does not alter the set of feasible lifetime consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. This note establishes that the very expectations the thesis proposes (‘Ricardian expectations') are invalidated if households act rationally. The divergence from Ricardian equivalence 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.

Suggested Citation

Schlicht, Ekkehart, Unexpected Consequences of Ricardian Expectations (July 2013). Metroeconomica, Vol. 64, Issue 3, pp. 498-512, 2013. Available at SSRN: https://ssrn.com/abstract=2275146 or http://dx.doi.org/10.1111/meca.12017

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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