Who owes what, and to whom? Public debt, Ricardian equivalence, and governmental form

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence, the scale and composition of the public debt matter for inflation. High and moderate duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments conducted in an estimated model reveal that the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods if US debt levels had been those observed in Italy or Japan. (JEL D84, E31, E32, E52, E62, H63)

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The Incidence and Effects of Public Debt in the Absence of Fiscal Illusion

Public Finance Quarterly ◽

10.1177/109114218701500101 ◽

1987 ◽

Vol 15 (1) ◽

pp. 5-25 ◽

Cited By ~ 18

Author(s):

James M. Buchanan ◽

Jennifer Roback

Keyword(s):

Public Debt ◽

Ricardian Equivalence ◽

Positive Theory ◽

Fiscal Illusion ◽

Redistribute Income ◽

Voting Model

This article clarifies several points concerning the effects of public debt. First, the article clarifies the distinction between the Ricardian equivalence and Barro neutrality theorems. Second, the article develops a voting model with two types of families, neither of whom have fiscal illusion. We show that debt may have redistributive consequences and that some voters will rationally prefer debt to taxes. In this way, we develop a rudimentary positive theory of debt issue. We also verify the proposition that debt issues that redistribute income are not neutral with respect to savings and consumption.

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DESIGNING MONETARY AND FISCAL POLICY RULES IN A NEW KEYNESIAN MODEL WITH RULE-OF-THUMB CONSUMERS

Macroeconomic Dynamics ◽

10.1017/s1365100512000430 ◽

2012 ◽

Vol 18 (2) ◽

pp. 395-417 ◽

Cited By ~ 8

Author(s):

Raffaele Rossi

Keyword(s):

Steady State ◽

Fiscal Policy ◽

Public Debt ◽

New Keynesian ◽

Ricardian Equivalence ◽

New Keynesian Model ◽

Policy Rules ◽

Rule Of Thumb ◽

Keynesian Model ◽

Monetary And Fiscal Policy

This paper studies the determinacy properties of monetary and fiscal policy rules in a small-scale New Keynesian model. We modify the standard model in two ways. First, we allow positive public debt in the steady state as in Leeper [Journal of Monetary Economics 27, 129–147 (1991)]. Second, we add rule-of-thumb consumers as in Bilbiie [Journal of Economic Theory 140, 162–196 (2008)]. Leeper studied a model in which Ricardian equivalence holds, and he showed that monetary and fiscal policy can be studied independently. In Bilbiie's analysis, rule-of-thumb consumers break the Ricardian equivalence and generate important consequences for the design of monetary policy. In his model, steady-state public debt was equal to zero. We study a model with both rule-of-thumb consumers and positive steady-state public debt. We find that the mix of fiscal and monetary policies that guarantees equilibrium determinacy is sensitive to the exact values of the parameters of the model.

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Does the Ricardian Equivalence Theorem Capture the Consumption Behavior of Maltese Households?

International Journal of Economics and Finance ◽

10.5539/ijef.v10n12p77 ◽

2018 ◽

Vol 10 (12) ◽

pp. 77

Author(s):

Ian P. Cassar ◽

Kurt Davison ◽

Christian Xuereb

Keyword(s):

Open Economy ◽

Public Debt ◽

Private Consumption ◽

Household Consumption ◽

Equivalence Theorem ◽

Future Generations ◽

Consumption Pattern ◽

Ricardian Equivalence ◽

Consumption Behavior ◽

High Level

This paper explores the relationship between government debt and private consumption for Malta. In particular, it attempts to find evidence in favor or against the proposition that the consumption behavior of Maltese households follows the Ricardian Equivalence Theorem. The empirical findings from this analysis suggest that household consumption behavior in Malta is not Ricardian. The resulting lack of evidence supporting the presence of a cointegrating relationship between private consumption and public debt indicates that there is no long run relationship amongst these two variables. However, the results obtained from a subsequent application of a vector auto regressive generalized impulse response function suggests that in the short-term a rise in public debt does positively influence private household consumption. This implies that Keynesian theory may be better suited at explaining the underlying behavior of Maltese households in response to changes in the level of public debt, supporting the view that Maltese households, on aggregate, exhibit a myopic behavior with regards to household consumption patterns. This suggests that to an extent, the Government may thus be able to take advantage of the implicit effectiveness of an expansionary fiscal stance to stimulate the economy through higher aggregate consumption, at least in the short run. However, it should be noted that in the case of Malta the non-presence of the Ricardian Equivalence Theorem may not necessarily imply a high level of effectiveness of Keynesian fiscal policy, given that Malta is a small and open economy characterized by a high level of import content in its aggregate demand components. The longer-term implications pertaining to the public debt burden on future generations should be taken into account by policy makers as higher levels of debt could result in an eventual contractionary fiscal stance, which would negatively impact the consumption pattern of future generations.

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Ricardian Equivalence revisited: introductory notes

Brazilian Journal of Political Economy ◽

10.1590/0101-31572021-3235 ◽

2022 ◽

Vol 42 (1) ◽

pp. 113-127

Author(s):

Maria Isabel Busato

Keyword(s):

Interest Rate ◽

Public Debt ◽

Real Interest Rate ◽

Final Section ◽

Government Expenditure ◽

Equivalence Theorem ◽

Ricardian Equivalence ◽

Real Effect ◽

The Real ◽

Tax Reduction

ABSTRACT These notes aim to revisit the debate, the model, the results, and main objections to the validity of the Ricardian Equivalence Theorem as presented in Barro (1974). It is intended to explore his thesis that tax and debt are equivalent and have no real effect on perceived wealth, demand, the real interest rate or on the economy. The thesis refers to the analysis of the ways of financing debt at a given level of government expenditure and does not address the effects of an expansion of this volume of spending, nor it specifically analyzes the effects of an increase in public debt due to a tax reduction policy. After this presentation, the thesis is debated, consolidating some of the premises that are necessary to validate it. The purpose of the paper is to explore the first round of debates on the theme, explaining the restrictions to which the Barro-Ricardo Theorem or the Ricardian Equivalence Theorem is subject, based on the publications by Barro (1976), Buchanan (1976) and Feldstein (1976), all of them within the ‘realm’ of economic orthodoxy. The final section presents some remarks and an analysis of Barro’s later work (1989 and 1996).

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