Ricardian equivalence revisited: Deficits, gifts and bequests

Journal of Economic Dynamics and Control, 2016, vol. 63, issue C, 1-24

Abstract: Barro (1974) shows that operative altruistic transfer motives are key for Ricardian equivalence to hold. This paper evaluates the importance of this mechanism quantitatively by studying deficit-financed tax cut experiments. I use a heterogeneous-agents overlapping-generations economy with endogenously operative transfer motives to capture the fact that empirically transfers occur in some but not in all families. Altruism is calibrated to match aggregate transfer statistics. I find that the response of aggregate consumption to a tax cut is in the ballpark of a standard overlapping-generations economy, that is, an economy without altruistic family links. Welfare implications of this economy, however, move closer to a dynastic economy.

Keywords: Ricardian equivalence; Consumption response to tax cut; Interaction between government and private transfers (search for similar items in EconPapers)
JEL-codes: D64 H31 H62 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:63:y:2016:i:c:p:1-24

DOI: 10.1016/j.jedc.2015.11.004

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