<p>I think you're misreading what Sala wrote. The first sentence in the image you linked is just saying that in the worlds where either Case 1 or Case 2 occurs, the response of $b_t$ to a shock in $s_t$ allows us to differentiate between Ricardian and non-Ricardian regimes since there are no identification issues. In other words, if either the Case 1 inequalities or the Case 2 inequalities hold, then we can be confident that we have identified a non-Ricardian regime from a Ricardian regime.</p>

<p>According to Sala, it seems that we cannot as easily identify Ricardian regimes from non-Ricardian regimes in Case 3 due to identification issues related to co-movements in real debt.</p>

CC BY-SA 3.0
2018-01-21T17:41:27.320Z
Ah, of course, now I see it! Really appreciate the help.
user11767
CC BY-SA 3.0
2018-01-21T17:44:57.740Z
Glad I could help.
Kenneth Rios
CC BY-SA 3.0
2018-01-21T17:16:07.037Z
2018-01-21T17:32:13.733Z
2018-01-21T17:32:13.733Z
Kenneth Rios
<p>I am reading <a href="https://poseidon01.ssrn.com/delivery.php?ID=025078121121078077093105077031109009116008031085056044126100100009101077075089123065033020049102118033018094021122114070092014085037055023091119089123064099121064008016102019069100009015127085125126083084064100082124100118104121005086122017103088&amp;EXT=pdf" rel="nofollow noreferrer">Sala (2004)</a> and I think I have found a mistake in the paper. On page 7 the author argues that one can differentiate between Ricardian and Non-Ricardian policy regimes by considering correlations between primary surpluses and their effect on real debt. See <a href="https://i.sstatic.net/avapY.jpg" rel="nofollow noreferrer">this</a> picture.</p>

<p>Where $s_t$ is current primary surplus, $\alpha_t$ is the discount factor and $b_t$ is the real debt.</p>

<p>He says:</p>

<blockquote>
  <p>if the response of $b_t$
  to $s_t$ is negative, the regime is Ricardian; if the response of $b_t$ to $s_t$ is nonnegative,
  the regime is Non Ricardian</p>
</blockquote>

<p>While I agree with this, I don't agree with what he wrote in the picture I linked to. I.e that case 1 represents the Ricardian regime and case 2 the non-RIcardian regime. </p>

<p>In case 1 there is no correlation between current primary surplus ($s_t$) and future surpluses ($s_{t+k})$, thus the real value of debt is constant. How is this consistent with the quote above? To me, case 3, i.e the one where $\text{corr}(s_{t},s_{t+k}) &lt; 0$ should be the Ricardian regime because high surpluses today imply low surpluses tomorrow.</p>

<p>Have I misunderstood the author or did he mean to write 'Case 2 and 3 allow for regime identification'?</p>

<macroeconomics><government-debt>
Ricardian vs Non-Ricardian policy identification
user11767
# Ricardian vs Non-Ricardian policy identification

(Asked by: username_0 on 2018-01-21)

I am reading [Sala (2004)](https://poseidon01.ssrn.com/delivery.php?ID=025078121121078077093105077031109009116008031085056044126100100009101077075089123065033020049102118033018094021122114070092014085037055023091119089123064099121064008016102019069100009015127085125126083084064100082124100118104121005086122017103088&EXT=pdf) and I think I have found a mistake in the paper. On page 7 the author argues that one can differentiate between Ricardian and Non-Ricardian policy regimes by considering correlations between primary surpluses and their effect on real debt. See [this](https://i.sstatic.net/avapY.jpg) picture.

Where $s\_t$ is current primary surplus, $\alpha\_t$ is the discount factor and $b\_t$ is the real debt.

He says:

> if the response of $b\_t$
> to $s\_t$ is negative, the regime is Ricardian; if the response of $b\_t$ to $s\_t$ is nonnegative,
> the regime is Non Ricardian

While I agree with this, I don't agree with what he wrote in the picture I linked to. I.e that case 1 represents the Ricardian regime and case 2 the non-RIcardian regime.

In case 1 there is no correlation between current primary surplus ($s\_t$) and future surpluses ($s\_{t+k})$, thus the real value of debt is constant. How is this consistent with the quote above? To me, case 3, i.e the one where $\text{corr}(s\_{t},s\_{t+k}) < 0$ should be the Ricardian regime because high surpluses today imply low surpluses tomorrow.

Have I misunderstood the author or did he mean to write 'Case 2 and 3 allow for regime identification'?

**Tags:** macroeconomics, government-debt

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## 1 answers

### Answer by username_1 on 2018-01-21. Score: 1 | Accepted answer

I think you're misreading what Sala wrote. The first sentence in the image you linked is just saying that in the worlds where either Case 1 or Case 2 occurs, the response of $b\_t$ to a shock in $s\_t$ allows us to differentiate between Ricardian and non-Ricardian regimes since there are no identification issues. In other words, if either the Case 1 inequalities or the Case 2 inequalities hold, then we can be confident that we have identified a non-Ricardian regime from a Ricardian regime.

According to Sala, it seems that we cannot as easily identify Ricardian regimes from non-Ricardian regimes in Case 3 due to identification issues related to co-movements in real debt.

> **Comments:**
> **username_0**: Ah, of course, now I see it! Really appreciate the help.  
> **username_1**: Glad I could help.  

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