Does Ricardian Equivalence Hold When Expectations Are Not Rational? |
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| Authors: | GEORGE W EVANS SEPPO HONKAPOHJA KAUSHIK MITRA |
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| Institution: | George W. Evans is a Professor in the Economics Department, University of Oregon and a Professor in the School of Economics and Finance, University of St. Andrews (E‐mail: gevans42@gmail.com). Seppo Honkapohja is a Member of the Governing Board, Bank of Finland (E‐mail: Seppo.Honkapohja@bof.fi). Kaushik Mitra is a Professor in the School of Economics and Finance, University of St. Andrews (E‐mail: km91@st‐andrews.ac.uk). |
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| Abstract: | This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing. |
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| Keywords: | D84 E21 E43 E62 taxation expectations Ramsey model Ricardian equivalence |
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