We thank an anonymous referee and the seminar audiences in the Universities of Heriot-Watt, Manchester, Oregon, St. Andrews and Vienna, the May 2010 workshop on Modern Economic Forecasting, at the University of Oslo, and the December 2010 Australian Conference on Quantitative Macroeconomics, at the University of Adelaide, and especially the discussant, Bruce Preston, for useful comments. Financial support from ESRC Grant no. RES-062-23-2617 and from National Science Foundation Grant no. SES-1025011 is gratefully acknowledged. Any views expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
Does Ricardian Equivalence Hold When Expectations Are Not Rational?
Article first published online: 19 SEP 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 7, pages 1259–1283, October 2012
How to Cite
EVANS, G. W., HONKAPOHJA, S. and MITRA, K. (2012), Does Ricardian Equivalence Hold When Expectations Are Not Rational?. Journal of Money, Credit and Banking, 44: 1259–1283. doi: 10.1111/j.1538-4616.2012.00531.x
- Issue published online: 19 SEP 2012
- Article first published online: 19 SEP 2012
- Received June 22, 2011; and accepted in revised form February 15, 2012.
- Ramsey model;
- Ricardian equivalence
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.