Ricardian equivalence, also called the Ricardo-de Viti-Barro equivalence theorem, is an economic hypothesis holding that consumers are forward looking and so factor the government's overall budget constraint into their own consumption decisions. Under the theory, for a given level of government spending, it makes no real economic difference whether that spending is financed by taxation now or by issuing debt that requires higher taxes later, because rational taxpayers anticipate the future tax increase needed to repay government borrowing and save rather than spend any tax cut they receive today, leaving total demand in the economy unchanged. The idea traces to the early nineteenth century economist David Ricardo, who nonetheless doubted its own practical relevance; the Italian economist Antonio de Viti de Marco developed it further in the 1890s, and the American economist Robert Barro revived and formalized it in the 1970s, making it a cornerstone of new classical macroeconomics built on assumptions of rational expectations and well functioning capital markets. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/
Facts
FieldMacroeconomics and public finance 1 Proposed ByDavid Ricardo first proposed the possibility in the early nineteenth century though he doubted its practical relevance; Robert J. Barro gave it a formal theoretical foundation in 1974 1 Ricardo's own proposal predates Barro's formalization by roughly a century and a half and carries no precise year in the source; Barro's own paper is dated 1974 (see origin-year). Origin YearYear of Barro's formal theoretical treatment; Ricardo's own earlier, more tentative proposal is dated only to the early nineteenth century in the source (see proposed-by). SignificanceImplies that, for a given path of government spending, whether it is financed by taxes now or by borrowing (taxes later) does not change aggregate demand, because forward-looking consumers save an anticipated future tax increase. 1 Connections
Associated With
Named for Ricardo, who raised the underlying idea in his 1820 Essay on the Funding System, though he doubted its practical relevance; Associated With rather than Attributed To, since the modern theorem's formal origin is Robert Barro's, not Ricardo's own.
Source Wikipedia
Additional Source Ricardian equivalence (Wikipedia)
Attributed To
Buchanan named and analyzed the Ricardian equivalence theorem in his 1976 Journal of Political Economy paper Barro on the Ricardian Equivalence Theorem, responding to Robert Barro's 1974 formalization.
Source Wikipedia
Additional Source Ricardian equivalence (Wikipedia)
Sources
1. Ricardian equivalence (Wikipedia)
Lead section
This leads to the result that, for a given pattern of government spending, the method of financing such spending does not affect agents' consumption decisions, and thus, it does not change aggregate demand.
Introduction section
David Ricardo was the first to propose this possibility in the early nineteenth century; however, he was unconvinced of its empirical relevance.
Ricardo-de Viti-Barro equivalence section
In 1974, Robert J. Barro provided some theoretical foundation for Ricardo's hesitant speculation (apparently in ignorance of Ricardo's earlier notion and de Viti's subsequent extensions).
- Attributed To: James M. Buchanan
- Associated With: David Ricardo
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