Research Discussion Papers, Bank of Finland
George W Evans, Seppo Honkapohja and Kaushik Mitra
Does Ricardian Equivalence hold when expectations are not rational?
Abstract: This paper shows that the Ricardian Equivalence
proposition can continue to hold when expectations are not rational and are
instead formed using adaptive learning rules. In temporary equilibrium,
with given expectations, Ricardian Equivalence holds under the standard
conditions for its validity under rational expectations. Furthermore,
Ricardian Equivalence holds for paths of temporary equilibria under
learning provided suitable additional conditions on learning dynamics are
satisfied. New cases of failure of the Ricardian proposition emerge under
learning. Most importantly, agents’ expectations must not depend on
government financial variables under deficit financing.
Keywords: taxation; expectations; Ramsey model; Ricardian Equivalence; (follow links to similar papers)
JEL-Codes: D84; E21; E43; E62; (follow links to similar papers)
26 pages, May 5, 2010
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