Academic literature on the topic 'Ricardian Equivalence Theorem'

The modern Ricardian equivalence theorem focuses on the intertemporal equivalence between taxation and bond financing of government expenditures that David Ricardo considered practically irrelevant, rather than their contemporaneous equivalence in terms of the opportunity cost of government spending. Relying upon the implausible assumption of each individual’s future tax-capitalization behavior that Ricardo explicitly rejected, the modern Ricardian equivalence theorem reaches the exact opposite conclusions about government deficit spending than Ricardo argued. This paper explains these fundamental problems with the modern Ricardian equivalence proposition and shows an alternative method of arguing Robert Barro’s original point about the inefficacy of Keynesian deficit spending.

Two of the most common measures adopted by the government to stimulate the economy are increasing government borrowings and implementing tax cuts. These tax cuts are financed through increased debt. According to the Ricardian equivalence theory, the consumers will not change their current spending when they anticipate a tax increase in the future. In order to pay high taxes in the future, the government should increase its present savings. However, the extent of applicability of Ricardian equivalence could vary across nations. In this context, the present study explores the long-running relationship between domestic borrowing and private savings in Turkey. For this purpose, the researcher collected the data for key variables, gross domestic savings, and government debt, for the period of 1980–2017. The researcher used unit root, cointegration, VECM, and the Granger causality test to examine the relationships among the variables. Apart from this, ARDL regression was used in order to examine the long-term relationships among the variables. The empirical results indicate that there is presence of bidirectional causality, indicating that Ricardian equivalence is applicable in the economy. Households display a rational behavior by increasing their savings during the periods in which high government expenditure is incurred.

The Ricardian Equivalence Hypothesis (REH) since resurrected by Barro (1974) states that deficit fmancing and taxation produce the same intertemporal allocation of consumption. To establish his theorem, Barro has to make a number of restrictive assumptions such as: all government revenue is collected by lump-sum taxation, debt is believed to be eventually repaid, capital markets are perfect, there is no uncertainty and agents are 'effectively' infinite-lived. To motivate the last assumption, Barro shows that because of purely altruistic motives, the agents derive utility from the welfare of their children and their grandchildren and so on such that through the inter-generational transfers, they act virtually like the infinitely lived. With the publication of Barro's seminal paper, a flood of theoretical and empirical literature on Ricardian Equivalence has emerged whiCh was published mostly in the 1970s and 1980s. A complete review of the literature is not possible. However, it must be pointed out that not a single study to the author's knowledge, has appeared dealing with developing countries. Kochin (1974); Aschauer (1985); Kormendi (1983); Leiderman and Razin (1988) have produced empirical support for the Ricardian Equivalence Hypothesis using data on USA, Canada and other developed countries. On the other hand, Buchanan (1986); Brennen (1987); Modigliani, Jappali and Pagano (1985); Feldstein (1976); Feldstein and Elmendorf (1987); Haque (1988); Buiter and Tobin (1980); Poterba and Summers (1988) produce evidence which is generally inconsistent with the basic logic of the Ricardian Equivalence Hypothesis. The overall reviews of the debate are presented in Bernheim (1987); Boskin, Flamming and Gorini (1987); Bernheim (1989) and Leiderman and Blajer (1988), which generally come to the conclusion contradicting the fmdings of the Ricardian Equivalence Hypothesis. A comprehensive review of REH literature is given in Kazmi (1991).

This paper explores the relationship between government debt and private consumption for Malta. In particular, it attempts to find evidence in favor or against the proposition that the consumption behavior of Maltese households follows the Ricardian Equivalence Theorem. The empirical findings from this analysis suggest that household consumption behavior in Malta is not Ricardian. The resulting lack of evidence supporting the presence of a cointegrating relationship between private consumption and public debt indicates that there is no long run relationship amongst these two variables. However, the results obtained from a subsequent application of a vector auto regressive generalized impulse response function suggests that in the short-term a rise in public debt does positively influence private household consumption. This implies that Keynesian theory may be better suited at explaining the underlying behavior of Maltese households in response to changes in the level of public debt, supporting the view that Maltese households, on aggregate, exhibit a myopic behavior with regards to household consumption patterns. This suggests that to an extent, the Government may thus be able to take advantage of the implicit effectiveness of an expansionary fiscal stance to stimulate the economy through higher aggregate consumption, at least in the short run. However, it should be noted that in the case of Malta the non-presence of the Ricardian Equivalence Theorem may not necessarily imply a high level of effectiveness of Keynesian fiscal policy, given that Malta is a small and open economy characterized by a high level of import content in its aggregate demand components. The longer-term implications pertaining to the public debt burden on future generations should be taken into account by policy makers as higher levels of debt could result in an eventual contractionary fiscal stance, which would negatively impact the consumption pattern of future generations.

This paper demonstrates that the traditional theory, that the current account balance and the budget balance are positively related, does not uphold when applied to Australian data. On the other hand, Australian data seems to indicate that Ricardian Equivalence Theorem better explains the movements in the economy.

The paper describes different approaches in the theory of economics (from Phillips curve through ricardian equivalence theorem to the demand for money) to the expectations of business entities on the future shape of basic macroeconomic aggregates. Inclusion of such expectations in theoretical framework of economics changes described economic processes and leads to change in the conclusions.

by Man Ka Kit.
Thesis (M.Phil.)--Chinese University of Hong Kong, 1994.
Includes bibliographical references (leaves 67-76).
ABSTRACT --- p.3
INTRODUCTION --- p.4
Chapter PART I --- WHAT IS PREDICTION? --- p.7
Chapter 1.1 --- Structure of Scientific Explanation： Covering-Law Model --- p.8
Chapter 1.2 --- Prediction and Theory choice --- p.10
Chapter 1.3 --- Prediction and Economic Methodology --- p.11
Chapter 1.4 --- Conventional Wisdom --- p.12
Chapter 1.41 --- Friedman's Methodology --- p.12
Chapter 1.42 --- The Impact of Popper --- p.14
Chapter 1.5 --- Unconventional Wisdom --- p.16
Chapter 1.51 --- KUHN AND LAKATOS --- p.16
Chapter 1.52 --- FEYERABEND THE ANARCHIST --- p.17
Chapter 1.6 --- Conclusion for Part I --- p.18
Chapter PART II --- MACROECONOMIC CONTROVERSY --- p.20
Chapter 2.1 --- "lucas' Critique, the New Classical and the New Keynesian" --- p.20
Chapter 2.2 --- The Role of Stabilization Policy --- p.22
Chapter 2.3 --- Effectiveness of Monetary Policy --- p.24
Chapter 2.4 --- effectiveness of fiscal policy --- p.25
Chapter 2.5 --- Conclusion for Part II --- p.26
Chapter PART III --- TESTING RICARDIAN EQUIVALENCE --- p.28
Chapter 3.1 --- ricardian equivalence versus keynesian theory --- p.29
Chapter 3:2 --- (unrealistic) assumptions behind ricardian proposition --- p.31
Chapter 3.21 --- "INEFINTIE horizon, altruism, and intergeneration transfer" --- p.31
Chapter 3.22 --- IMPERFECT CAPITAL MARKET --- p.34
Chapter 3 23 --- DISTORTIONARY TAX --- p.35
Chapter 3.24 --- "BOUNDED rationality, PERFECT FORESIGHT, AND RATIONAL EXPECTATIONS" --- p.36
Chapter 3.3 --- Empirical Evidence --- p.37
Chapter 3.31 --- CONSUMPTION FUNCTION STUDIES --- p.38
Chapter 3 32 --- INTEREST RATE STUDIES --- p.43
Chapter 3.4 --- technical problems： (unrealistic) assumptions behind the econometric models --- p.45
Chapter 3.41 --- Specification and Data Generation Process --- p.45
Chapter 3 42 --- IDENTIFICATION PROBLEM --- p.48
Chapter 3 43 --- staggerjng of (NOT-well-established) hypotheses --- p.49
Chapter 3.44 --- PROXIES FOR unobservables --- p.50
Chapter 3.5 --- Conclusion for Part III --- p.51
Chapter PART IV --- CONCLUSION --- p.53
Chapter 4.1 --- Duhem-Quine Thesis --- p.53
Chapter 4.2 --- The Austrians and Subjectivism --- p.55
Chapter 4.3 --- hausman --- p.57
Chapter 4.4 --- Friedman and Popper Revisited --- p.58
Chapter 4.5 --- The Role of Prediction --- p.61
EPILOGUE --- p.62
Ricardian Equivalence Vs Approximate Equivalence： Some Reflections --- p.62
Truth and Invariance --- p.63
"Certitude, Simplicity, and Irrationality" --- p.65
REFERENCES --- p.67

Cette thèse est une collection de trois articles en macroéconomie et finances publiques. Elle développe des modèles d'Equilibre Général Dynamique et Stochastique pour analyser les implications macroéconomiques des politiques d'imposition des entreprises en présence de marchés financiers imparfaits. Le premier chapitre analyse les mécanismes de transmission à l'économie, des effets d'un ré-échelonnement de l'impôt sur le profit des entreprises. Dans une économie constituée d'un gouvernement, d'une firme représentative et d'un ménage représentatif, j'élabore un théorème de l'équivalence ricardienne avec l'impôt sur le profit des entreprises. Plus particulièrement, j'établis que si les marchés financiers sont parfaits, un ré-échelonnement de l'impôt sur le profit des entreprises qui ne change pas la valeur présente de l'impôt total auquel l'entreprise est assujettie sur toute sa durée de vie n'a aucun effet réel sur l'économie si l'état utilise un impôt forfaitaire. Ensuite, en présence de marchés financiers imparfaits, je montre qu'une une baisse temporaire de l'impôt forfaitaire sur le profit des entreprises stimule l'investissement parce qu'il réduit temporairement le coût marginal de l'investissement. Enfin, mes résultats indiquent que si l'impôt est proportionnel au profit des entreprises, l'anticipation de taxes élevées dans le futur réduit le rendement espéré de l'investissement et atténue la stimulation de l'investissement engendrée par la réduction d'impôt. Le deuxième chapitre est écrit en collaboration avec Rui Castro. Dans cet article, nous avons quantifié les effets sur les décisions individuelles d'investis-sement et de production des entreprises ainsi que sur les agrégats macroéconomiques, d'une baisse temporaire de l'impôt sur le profit des entreprises en présence de marchés financiers imparfaits. Dans un modèle où les entreprises sont sujettes à des chocs de productivité idiosyncratiques, nous avons d'abord établi que le rationnement de crédit affecte plus les petites (jeunes) entreprises que les grandes entreprises. Pour des entreprises de même taille, les entreprises les plus productives sont celles qui souffrent le plus du manque de liquidité résultant des imperfections du marché financier. Ensuite, nous montré que pour une baisse de 1 dollar du revenu de l'impôt, l'investissement et la production augmentent respectivement de 26 et 3,5 centimes. L'effet cumulatif indique une augmentation de l'investissement et de la production agrégés respectivement de 4,6 et 7,2 centimes. Au niveau individuel, nos résultats indiquent que la politique stimule l'investissement des petites entreprises, initialement en manque de liquidité, alors qu'elle réduit l'investissement des grandes entreprises, initialement non contraintes. Le troisième chapitre est consacré à l'analyse des effets de la réforme de l'imposition des revenus d'entreprise proposée par le Trésor américain en 1992. La proposition de réforme recommande l'élimination des impôts sur les dividendes et les gains en capital et l'imposition d'une seule taxe sur le revenu des entreprises. Pour ce faire, j'ai eu recours à un modèle dynamique stochastique d'équilibre général avec marchés financiers imparfaits dans lequel les entreprises sont sujettes à des chocs idiosyncratiques de productivité. Les résultats indiquent que l'abolition des impôts sur les dividendes et les gains en capital réduisent les distorsions dans les choix d'investissement des entreprises, stimule l'investissement et entraîne une meilleure allocation du capital. Mais pour être financièrement soutenable, la réforme nécessite un relèvement du taux de l'impôt sur le profit des entreprises de 34\% à 42\%. Cette hausse du taux d'imposition décourage l'accumulation du capital. En somme, la réforme engendre une baisse de l'accumulation du capital et de la production respectivement de 8\% et 1\%. Néanmoins, elle améliore l'allocation du capital de 20\%, engendrant des gains de productivité de 1.41\% et une modeste augmentation du bien être des consommateurs.
This thesis is a collection of three papers in macroeconomics and public finance. It develops Dynamic Stochastic General Equilibrium Models with a special focus on financial frictions to analyze the effects of changes in corporate tax policy on firm level and macroeconomic aggregates. Chapter 1 develops a dynamic general equilibrium model with a representative firm to assess the short-run effects of changes in the timing of corporate profit taxes. First, it extends the Ricardian equivalence result to an environment with production and establishes that a temporary corporate profit tax cut financed by future tax-increase has no real effect when the tax is lump sum and capital markets are perfect. Second, I assess how strong the ricardian forces are in the presence of financing frictions. I find that when equity issuance is costly, and when the firm faces a lower bound on dividend payments, a temporary tax cut reduces temporary the marginal cost of investment and implies positive marginal propensity of investment. Third, I analyze how do the intertemporal substitution effects of tax cuts interact with the stimulative effects when tax is not lump-sum. The results show that when tax is proportional to corporate profit, the expectations of high future tax rates reduce the expected marginal return on investment and mitigate the stimulative effects of tax cuts. The net investment response depends on the relative strength of each effect. Chapter 2 is co-authored with Rui Castro. In this paper, we quantify how effective temporary corporate tax cuts are in stimulating investment and output via relaxation of financing frictions. In fact, policymakers often rely on temporary corporate tax cuts in order to provide incentives for business investment in recession times. A common motivation is that such policies help relax financing frictions, which might bind more during recessions. We assess whether this mechanism is effective. In an industry equilibrium model where some firms are financially constrained, marginal propensities to invest are high. We consider a transitory corporate tax cut, funded by public debt. By increasing current cash flows, corporate tax cuts are effective at stimulating current investment. On impact, aggregate investment increases by 26 cents per dollar of tax stimulus, and aggregate output by 3.5 cents. The stimulative output effects are long-lived, extending past the period the policy is reversed, leading to a cumulative effect multiplier on output of 7.2 cents. A major factor preventing larger effects is that this policy tends to significantly crowd out investment among the larger, unconstrained firms. Chapter 3 studies the effects of the 1992's U.S. Treasury Department proposal of a Comprehensive Business Income Tax (CBIT) reform. According to the U.S. tax code, dividend and capital gain are taxed at the firm level and further taxed when distributed to shareholders. This double taxation may reduce the overall return on investment and induce inefficient capital allocation. Therefore, tax reforms have been at the center of numerous debates among economists and policymakers. As part of this debate, the U.S. Department of Treasury proposed in 1992 to abolish dividend and capital gain taxes, and to use a Comprehensive Business Income Tax (CBIT) to levy tax on corporate income. In this paper, I use an industry equilibrium model where firms are subject to financing frictions, and idiosyncratic productivity and entry/exit shocks to assess the long run effects of the CBIT. I find that the elimination of the capital gain and dividend taxes is not self financing. More precisely, the corporate profit tax rate should be increased from 34\% to 42\% to keep the reform revenue-neutral. Overall, the results show that the CBIT reform reduces capital accumulation and output by 8\% and 1\%, respectively. However, it improves capital allocation by 20\%, resulting in an increase in aggregate productivity by 1.41\% and in a modest welfare gain.

This chapter considers the impact of the Great Depression, Keynes’ countercyclical policies, and the Keynesian Revolution. It also looks at the growth of welfare states and of taxes, increasing levels of marginal tax rates and the increasing power of labor unions. This chapter deals with the beginnings of a conservative counter-revolution. New theories, such as growing influence of. the Ricardian Equivalence Hypothesis, Rational Expectations theory, and the Laffer Curve were having a growing influence. Several countries experienced stagflation in the late 1970s. The 1970s included the rise of conservative politicians the arrival of the supply-side revolution and an attempted return to some laissez faire policies. This in turn led to attacks on regulations and on high marginal tax rates. Finally, the chapter heralds the growth of globalization.

This chapter looks at fiscal policy, broadly interpreted to include its implications on deficits, debt, and fiscal solvency. It is informally divided in two parts, starting from the latter set of issues. After introducing the budget deficit, debt and the government budget constraint, and related issues, it proceeds to analyse fiscal solvency, deriving formal conditions and discussing extensively indicators and required policy rules. The role of growth in ensuring fiscal solvency is put in sharp relief. Additionally, the ‘dilemma of austerity’ is critically discussed, i.e. whether ‘fiscal consolidations’ can in fact damage public finances by being recessionary. We then turn to the effects of fiscal policy on economic activity: A ‘toolkit’ of static fiscal multipliers is discussed, as is the intertemporal approach to fiscal policy (including Ricardian Equivalence), complemented by empirical evidence.