Ricardian equivalence
E52108
Ricardian equivalence is an economic theory proposing that consumers anticipate future taxes implied by government borrowing and therefore adjust their saving so that deficit-financed tax cuts do not affect overall demand.
Observed surface forms (2)
| Surface form | Occurrences |
|---|---|
| Barro-Ricardo equivalence | 1 |
| Ricardian debt neutrality | 1 |
Statements (47)
| Predicate | Object |
|---|---|
| instanceOf |
economic theory
ⓘ
macroeconomic theory ⓘ |
| assumes |
households fully understand government budget constraint
ⓘ
infinite-lived agents or operative intergenerational altruism ⓘ lump-sum taxes ⓘ no default on government debt ⓘ no distortionary taxation ⓘ no liquidity constraints ⓘ no myopia in consumer behavior ⓘ no uncertainty about future taxes ⓘ perfect capital markets ⓘ rational expectations ⓘ |
| category |
fiscal policy theory
ⓘ
intertemporal choice theory ⓘ |
| concerns |
effect of tax timing on consumption
ⓘ
relationship between public debt and private saving ⓘ |
| contrastsWith | Keynesian view that deficit-financed tax cuts raise demand ⓘ |
| coreIdea |
deficit-financed tax cuts do not change aggregate demand under certain conditions
ⓘ
forward-looking consumers adjust saving in response to fiscal policy ⓘ government borrowing implies future taxes ⓘ government budget constraint is internalized by private agents ⓘ timing of taxes does not affect consumption in present value terms ⓘ |
| criticizedFor |
assuming intergenerational altruism or infinite horizons
ⓘ
assuming lump-sum rather than distortionary taxes ⓘ assuming perfect capital markets ⓘ ignoring liquidity constraints faced by households ⓘ reliance on strong assumptions about consumer behavior ⓘ |
| empiricalStatus | empirical evidence is mixed ⓘ |
| field |
macroeconomics
ⓘ
public finance ⓘ |
| formalizedBy | Robert J. Barro in the 1970s ⓘ |
| hasAlternativeName |
Ricardian equivalence
ⓘ
surface form:
Ricardian debt neutrality
|
| historicalOrigin | ideas in David Ricardo's work on public debt ⓘ |
| implies |
consumption depends on the present value of government spending not on tax timing
ⓘ
fiscal deficits do not stimulate aggregate demand if conditions hold ⓘ government debt is not net wealth for the private sector under its assumptions ⓘ temporary tax cuts financed by debt are saved rather than consumed ⓘ |
| influences |
debates on deficit spending
ⓘ
design of tax policy debates ⓘ |
| majorProponent | Robert J. Barro ⓘ |
| mathematicalFormulation | equivalence between present value of taxes and present value of government spending ⓘ |
| namedAfter | David Ricardo ⓘ |
| relatedConcept |
Ricardian equivalence
self-linksurface differs
ⓘ
surface form:
Barro-Ricardo equivalence
government budget constraint ⓘ |
| typicalModelEnvironment | representative agent intertemporal optimization model ⓘ |
| usedIn |
analysis of fiscal policy effectiveness
ⓘ
models of public debt and taxation ⓘ |
Referenced by (4)
Full triples — surface form annotated when it differs from this entity's canonical label.
this entity surface form:
Ricardian debt neutrality
this entity surface form:
Barro-Ricardo equivalence