WORKING PAPERS ASSESSING RICARDIAN EQUIVALENCE Roberto RICCIUTI* Dipartimento di Economia Politica, Università di Siena Piazza San Francesco 7, 53100 Siena, Italy E-mail:
[email protected] ABSTRACT This paper reviews the literature on Ricardian equivalence. This hypothesis may be interpreted as a generalisation to the short and the long run of the theories which put no weight on the real effects of public policies on aggregate demand. We argue that Ricardian equivalence relies on both permanent income hypothesis and the fulfilment of the intertemporal government budget constraint. The theoretical literature emphasises several reasons for departures from this hypothesis. However, the empirical literature is inconclusive. When Ricardian equivalence is tested in a life-cycle framework the hypothesis is usually rejected, while when the empirical analysis is based on optimising models, it is usually accepted. JEL Classification: E62 – H31 – H62 – H63 Keywords: Fiscal Policy, debt, taxes, goverment spending * Simon Wren-Lewis introduced me to the topic. Alberto Dalmazzo, Peter Diamond and John Seater provided useful comments. I thank them retaining the property rights of any mistakes. March 2001 In point of economy, there is no real difference in either of three modes: for twenty millions in one payment, one million per annum for ever, or 1,200,000 for 45 years, are precisely the same value; but people who pay taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, reflecting on the probable duration of such taxes.