RICARDIAN EQUIVALENCE | MACROECONOMICS | LEARN OIKONOMIA
11Ricardian equivalence is an economic theory that states that the method of financing government spending doesn't affect the overall economy. The theory is based on the idea that consumers are forward-looking and will save any extra money from tax cuts to pay for future tax increases.
Here are some implications of Ricardian equivalence:
No effect on prices: Fluctuations in a lump-sum tax have no effect on prices.
No effect on consumption: The choice between levying lump-sum taxes and issuing government bonds doesn't affect household consumption patterns.
Ineffective fiscal policy: Fiscal policy changes like taxation or government spending are ineffective in stimulating the economy.
British economist David Ricardo first introduced the concept in the early 19th century, but Harvard economist Robert Barro is credited with formalizing and expanding on it in 1974. The extent to which Ricardian equivalence applies may vary across nations. The Eurozone Debt Crisis of 2010 is an example that partially aligns with Ricardian equivalence predictions.
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