Ricardian Consumers with Keynesian Propensities

38 Pages Posted: 28 Jun 2004

See all articles by Robert Barsky

Robert Barsky

Research Department, Federal Reserve Bank of Chicago; University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Stephen P. Zeldes

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: July 1984

Abstract

In this paper, we examine Ricardian equivalence of debt and tax finance in a world in which taxes are not lump-sum but are levied on risky labor income. First, we show that the marginal propensity to consume out of a tax cut, coupled with a future income tax increase, is positive under reasonable assumptions regarding preferences toward risk. Second, we document that the degree of income uncertainty facing the typical individual orfamily is large. Third, we show that, for plausible utility function parameters and distributions of future income, the MPC out of a tax cut is quantitatively large. Indeed, the MPC out of a tax cut, coupled with a future income tax increase, can be closer to the Keynesian value that ignores the future tax liabilities than to the Ricardian value that treats future taxes as if they were lump-sum.

Suggested Citation

Barsky, Robert B. and Mankiw, N. Gregory and Zeldes, Stephen P., Ricardian Consumers with Keynesian Propensities (July 1984). NBER Working Paper No. w1400. Available at SSRN: https://ssrn.com/abstract=327121

Robert B. Barsky (Contact Author)

Research Department, Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-9476 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

N. Gregory Mankiw

Harvard University - Department of Economics ( email )

Littauer Center
Room 223
Cambridge, MA 02138
United States
617-495-4301 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen P. Zeldes

Columbia Business School - Finance and Economics ( email )

3022 Broadway
Uris 825, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-2492 (Phone)
212-208-4699 (Fax)

HOME PAGE: http://www.columbia.edu/~spz1

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
42
Abstract Views
770
PlumX Metrics