A Case Where Barro Expectations Are Not Rational

Schlicht, Ekkehart (January 2012): A Case Where Barro Expectations Are Not Rational. Discussion Papers in Economics 2012-4

Abstract

This note generalizes Feldstein’s (1976) criticism of Barro’s(1974) analysis for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold “Barro expectations”: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations.

• Item Type: Paper
• Keywords: Barro-Ricardo equivalence, Ricardian equivalence, fiscal policy, debt, taxation, rational expectations
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Chairs > Chair of Institutional Economics (closed)
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: E2, E12, E6, H6
• Language: English

References

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Barro, R. J. (1989). The Ricardian Approach to Budget Deficits. The Journal of Economic Perspectives, 3(2): 37–54. URL http://www.jstor.org/pss/1942668.

Feldstein, M. (1976). Perceived Wealth in Bonds and Social Security. Journal of Political Economy, 84(2): 331–36. URL http://www.jstor.org/pss/1831904.

Romer, D. (1995). Advanced Macroeconomics. McGraw-Hill. URL http://www.amazon.de/dp/0070536678.

Schlicht, E. (2006). Public Debt as Private Wealth. Metroeconomica: 594–520. URL http://epub.ub.uni-muenchen.de/2143/1/schlicht-public-debt-13-RP.pdf.