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Unexpected Consequences of R icardian Expectations
Author(s) -
Schlicht Ekkehart
Publication year - 2013
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12017
Subject(s) - ricardian equivalence , economics , debt , consumption (sociology) , equivalence (formal languages) , interest rate , divergence (linguistics) , monetary economics , microeconomics , macroeconomics , social science , linguistics , philosophy , sociology
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.