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Does Ricardian Equivalence Hold When Expectations Are Not Rational?
Author(s) -
EVANS GEORGE W.,
HONKAPOHJA SEPPO,
MITRA KAUSHIK
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00531.x
Subject(s) - ricardian equivalence , equivalence (formal languages) , proposition , rational expectations , economics , mathematical economics , adaptive learning , econometrics , keynesian economics , mathematics , computer science , pure mathematics , philosophy , artificial intelligence , epistemology , fiscal policy
This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing.