Ricardian equivalence

Ricardian Equivalence

Because we also disagree with Ricardian Equivalence, we will only provide a definition and a simple argument against it.

Ricardian Equivalence says that the government should not try to use fiscal policy to influence the economy. It is a theory that refers to fiscal policies as "tax now and tax later" policies where the government will have to use taxes and bonds to pay for its debts currently and more taxes to repay those bonds later.

It is not a theory that most economists agree with because it makes fiscal policy seem completely pointless. In Keynesian models, fiscal policy has a multiplier effect on demand, meaning that its affect on demand is much greater than the initial dollar amount of change. It boosts the economy and helps increase consumption, thus demand and overall GDP.

---

• Back to the home page for Behavioral Economics

• Ricardian equivalence

• The independence of consumption and current income

• The independence of investment and finance decisions

• Inflation stability only at the natural rate of unemployment

• The ineffectiveness of macro-stabilization policy with rational expectations