Does Ricardian Equivalence Hold When Expectations Are Not Rational?

George W. Evans, Seppo Honkapohja, Kaushik Mitra

Research output: Contribution to journalArticlepeer-review

20 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)1259-1283
JournalJournal of Money, Credit and Banking
Volume44
Issue number7
Early online date20 Sep 2012
DOIs
Publication statusPublished - Oct 2012

Keywords

  • D84
  • E21
  • E43
  • E62
  • taxation
  • expectations
  • Ramsey model
  • Ricardian equivalence

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