Definition of Ricardian equivalence This is the idea that consumers anticipate the future so if they receive a tax cut financed by government borrowing they anticipate future taxes will rise. Therefore, their lifetime income remains unchanged and so consumer spending remains unchanged. Similarly, higher government spending, financed by borrowing, will imply lower spending in the future. If this theory is true, it would mean a tax cut financed by higher borrowing would have no impact on increasing aggregate demand because consumers would save the tax cut to pay the future tax increases. The principle behind Ricardian equivalence can be illustrated by this simple trade-off. If tax cuts, increase disposable income in the short-term, then it reduces disposable income in the long-term.
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Gary S. Becker, Barro, Robert J, Robert J. Barro, Gordon, Barro, Robert J. David R. Bohn, Henning, Lucas, Robert Jr. Robert E. Lucas Jr.
Stokey, O'Driscoll, Gerald P, Jr, Buchanan, James M, Feldstein, Martin S, Ferraro, An empirical analysis of the relationship between total debt and economic output ," European Journal of Government and Economics , Europa Grande, vol. Gabriel Di Bella, Yang-Ming Chang, You can help correct errors and omissions.
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FRED data. Reflections on Ricardian Equivalence. Registered: Robert J. The Ricardian equivalence proposition for public debt in my JPE paper is related to the discussions in Ricardo's Funding System, Smith's Wealth of Nations, and a number of treatments in macroeconomics from the s to the s. Useful extensions of the basic invariance proposition involve tax smoothing in the context of distorting taxation and the determinants of the maturity and other characteristics of the debt structure in an environment of uncertainty.
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The Ricardian equivalence proposition also known as the Ricardo—de Viti—Barro equivalence theorem  is an economic hypothesis holding that consumers are forward looking and so internalize the government's budget constraint when making their consumption decisions. This leads to the result that, for a given pattern of government spending, the method of financing that spending does not affect agents' consumption decisions, and thus, it does not change aggregate demand. Governments can finance their expenditures by creating new money, by levying taxes, or by issuing bonds. Since bonds are loans, they must eventually be repaid—presumably by raising taxes in the future. The choice is therefore "tax now or tax later. Suppose that the government finances some extra spending through deficits; i.
Ricardian Equivalence Theorem
The Ricardian equivalence proposition for public debt in my JPE paper is related to the discussions in Ricardo's Funding System, Smith's Wealth of Nations, and a number of treatments in macroeconomics from the s to the s. Useful extensions of the basic invariance proposition involve tax smoothing in the context of distorting taxation and the determinants of the maturity and other characteristics of the debt structure in an environment of uncertainty. Published: Maloney, J. Debt and Deficits: An Historical Perspective. Edward Elgar, Reflections on Ricardian Equivalence Robert J. Development of the American Economy.