Get access

Does Ricardian Equivalence Hold When Expectations Are Not Rational?

Authors


  • 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.

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.

Get access to the full text of this article

Ancillary