<p>This link to a 43 page paper: Ricardian equivalence: an empirical application to the Portuguese economy CarlosFonseca Marinheiro</p>
<p><a href="https://core.ac.uk/download/pdf/6978949.pdf" rel="nofollow noreferrer">https://core.ac.uk/download/pdf/6978949.pdf</a></p>
<p>Introduction on page 3:</p>
<blockquote>
<p>The fiscal policy may be used with a stabilising role if the government finance decisions are able to influence private consumption (i.e., aggregate demand) and saving. This influence depends on the degree to which consumers treat government debt as net wealth.</p>
</blockquote>
<p>If Ricardian equivalence holds then the government cannot stimulate aggregate demand by increasing spending and/or reducing taxes. So history of economic debate over the effectiveness of fiscal policy includes this theory called Ricardian equivalence.</p>
<blockquote>
<p>According  to  the  Keynesian  consensus  consumers  treat  government  debt  as  net  wealth. Therefore, a substitution of debt for taxes has a positive influence on private consumption and  aggregate  demand.  However,  the  consequent  decrease  in  private  and  national  saving, implies  an  increase  in  the  real  interest  rate,  which  crowds  out  private  investment.  The reduction  in  the  capital  accumulation  then  leads  to  a  reduction  of  the  long-term  growth prospects of the economy. This negative long-run effect offsets some of the positive short-term effects of the government deficit.</p>
</blockquote>
<blockquote>
<p>The  Ricardian  thesis  has  a  complete  opposite  view.  It  states  that,  for  a  given  expenditure path, substitution of debt for taxes has no effect on aggregate demand nor in interest rates.The  government’s  inter-temporal  budget  constraint  implies  that,  for  an  unaltered  level  of government outlays, a tax cut now implies a tax increase in the future. As borrowing only postpone  taxes  for  the  future,  consumers,  who  are  simultaneously  taxpayers,  anticipating the increase in future taxes, do not consider the current tax cut and the consequent increase in  disposable  income  as  being  permanent.  Their  inter-temporal  budget  restriction  is  left unaltered.  Therefore,  consumption  is  also  unaffected.  The  increased  disposable  income  is entirely saved.</p>
</blockquote>
<p>Then there is another historic economic debate over the concept called &quot;crowding out.&quot;</p>

CC BY-SA 4.0
2021-01-07T02:30:39.170Z
Does real life not disprove this assertion that consumers anticipate future changes?
Criticize SE actions means ban
CC BY-SA 4.0
2021-01-07T02:41:46.413Z
Barro is given credit for developing the theory of Ricardian equivalence. As I recall from earlier reading he may have admitted at some point that it is easy to dismiss Ricardian equivalence by rejecting one or more of the assumptions under which it might hold true. He then argued that it is still useful to question the effectiveness of fiscal policy under this theory. Personally I think if there is involuntary unemployment and persistently unused productive capacity in the economy then government deficit spending can stimulate aggregate demand without crowding out private investment.
SystemTheory
CC BY-SA 4.0
2021-01-07T02:52:43.433Z
that can only happen if private investment is suboptimal to begin with. Maybe one of the assumptions is that private investment is optimal.
Criticize SE actions means ban
CC BY-SA 4.0
2021-01-07T02:54:28.710Z
Productive capacity utilization and levels of unemployment are econometric measures or statistical estimates not assumptions in a theoretical model.
SystemTheory
CC BY-SA 4.0
2021-01-07T03:05:06.917Z
One can assume that productive capacity is always fully utilized.
Criticize SE actions means ban
CC BY-SA 4.0
2021-01-07T03:18:09.430Z
One can assume any ideal or purely theoretical condition holds and it is pure philosophical speculation without reference to an econometric method to validate or invalidate the working assumption.
SystemTheory
CC BY-SA 4.0
2021-01-06T20:11:38.153Z
2021-01-07T02:04:26.910Z
2021-01-07T02:04:26.910Z
SystemTheory
<p>Ricardian equivalence is a result regarding the ineffectiveness of government due to consumption smoothing behavior of consumers. A primary reason why it fails is due to population turnover (i.e people have finite lives).</p>
<p>In spite of these issues why is Ricardian equivalence important to know about in terms of its use as actionable information.</p>

CC BY-SA 4.0
2021-01-06T18:20:19.590Z
Your question presumes it is.
Michael Greinecker
CC BY-SA 4.0
2021-01-06T18:50:40.243Z
@MichaelGreinecker if its not important why teach it? Presumably theres a reason why its taught.
EconJohn
CC BY-SA 4.0
2021-01-06T18:52:35.973Z
Something can be important without directly being related to "informing actionable policy."
Michael Greinecker
CC BY-SA 4.0
2021-01-06T19:46:54.703Z
@MichaelGreinecker I think that is a matter of educational philosophy. I have made a slight edit to the above question.
EconJohn
<macroeconomics><soft-question>
Why is Ricardian Equivalence Important?
EconJohn
# Why is Ricardian Equivalence Important?

(Asked by: username_0 on 2021-01-06)

Ricardian equivalence is a result regarding the ineffectiveness of government due to consumption smoothing behavior of consumers. A primary reason why it fails is due to population turnover (i.e people have finite lives).

In spite of these issues why is Ricardian equivalence important to know about in terms of its use as actionable information.

**Tags:** macroeconomics, soft-question
> **Comments:**
> **username_1**: Your question presumes it is.  
> **username_0**: @MichaelGreinecker if its not important why teach it? Presumably theres a reason why its taught.  
> **username_1**: Something can be important without directly being related to "informing actionable policy."  
> **username_0**: @MichaelGreinecker I think that is a matter of educational philosophy. I have made a slight edit to the above question.  

---

## 1 answers

### Answer by username_2 on 2021-01-06. Score: 2

This link to a 43 page paper: Ricardian equivalence: an empirical application to the Portuguese economy CarlosFonseca Marinheiro

<https://core.ac.uk/download/pdf/6978949.pdf>

Introduction on page 3:

> The fiscal policy may be used with a stabilising role if the government finance decisions are able to influence private consumption (i.e., aggregate demand) and saving. This influence depends on the degree to which consumers treat government debt as net wealth.

If Ricardian equivalence holds then the government cannot stimulate aggregate demand by increasing spending and/or reducing taxes. So history of economic debate over the effectiveness of fiscal policy includes this theory called Ricardian equivalence.

> According to the Keynesian consensus consumers treat government debt as net wealth. Therefore, a substitution of debt for taxes has a positive influence on private consumption and aggregate demand. However, the consequent decrease in private and national saving, implies an increase in the real interest rate, which crowds out private investment. The reduction in the capital accumulation then leads to a reduction of the long-term growth prospects of the economy. This negative long-run effect offsets some of the positive short-term effects of the government deficit.

> The Ricardian thesis has a complete opposite view. It states that, for a given expenditure path, substitution of debt for taxes has no effect on aggregate demand nor in interest rates.The government’s inter-temporal budget constraint implies that, for an unaltered level of government outlays, a tax cut now implies a tax increase in the future. As borrowing only postpone taxes for the future, consumers, who are simultaneously taxpayers, anticipating the increase in future taxes, do not consider the current tax cut and the consequent increase in disposable income as being permanent. Their inter-temporal budget restriction is left unaltered. Therefore, consumption is also unaffected. The increased disposable income is entirely saved.

Then there is another historic economic debate over the concept called "crowding out."

> **Comments:**
> **username_3**: Does real life not disprove this assertion that consumers anticipate future changes?  
> **username_2**: Barro is given credit for developing the theory of Ricardian equivalence. As I recall from earlier reading he may have admitted at some point that it is easy to dismiss Ricardian equivalence by rejecting one or more of the assumptions under which it might hold true. He then argued that it is still useful to question the effectiveness of fiscal policy under this theory. Personally I think if there is involuntary unemployment and persistently unused productive capacity in the economy then government deficit spending can stimulate aggregate demand without crowding out private investment.  
> **username_3**: that can only happen if private investment is suboptimal to begin with. Maybe one of the assumptions is that private investment is optimal.  
> **username_2**: Productive capacity utilization and levels of unemployment are econometric measures or statistical estimates not assumptions in a theoretical model.  
> **username_3**: One can assume that productive capacity is always fully utilized.  
> **username_2**: One can assume any ideal or purely theoretical condition holds and it is pure philosophical speculation without reference to an econometric method to validate or invalidate the working assumption.  

---

