What is Ricardian equivalence?

Ricardian equivalence, sometimes called the equivalence of Barro-Dicardo, is a hypothesis used to indicate that deficit expenditure cannot stimulate the economy. The proposed equivalence is currently among taxes and in the future. According to Ricardian equivalence, expenses with a deficit are equal to an immediate increment of taxes because the economic participants acknowledge that the deficit requires future taxes. Modern wording was developed in 1974 by Robert Barro. Barro actively promoted the theory and expressed it in general form and stated that interest rates would not be influenced by the division of the deficit between debt and tax.

The logic of Ricardian equivalent is that households will acknowledge that government debt requires future taxation. The amount necessary in the future for repaying the debt -published debt will be expanded as the function of time and interest rates. Private wealth will be expanded in the same way. Household planning should therefore allocate the amount of money to pay in taxes now, because this money youIt makes interest at the same rate for which government debt is increasing.

Many assumptions go into the idea of ​​Ricardian equivalence. Families must plan infinitely in the future. It must be completely rational. They must expect to continue to obtain taxable income at the same rate. The government must not have any other sources of income or strategy to deal with its debt. People must also appreciate their future wealth to the same extent as they appreciate their current wealth. In addition, they must evaluate the wealth of their children to the same extent and there must be a smooth transition of wealth to parents and children.

In order to work, there must be no population growth that would distribute the current debt to multiple taxpayers. There must be no increase in national wealth - economic growth - which would facilitate the debt together. Some of these assumptions were recognized by Barro himself; Others were ZDOutheat critics such as Martin Feldstein and James Buchanan.

strong empirical evidence for Ricardian equivalence is thin and most economists do not accept the hypothesis as correct. Many arguments for and against debt still exist, but Ricardian equivalence does not serve as a powerful tool on both sides of the debate.