Working Paper: NBER ID: w2613
Authors: Andrew B. Abel; B. Douglas Bernheim
Abstract: Recent work demonstrates that dynastic assumptions guarantee the irrelevance of all redistributional polices, distortionary taxes, and prices--the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." In this paper, we investigate the possibility of reinstating approximate Ricardian equivalence. by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction my dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. Although this intuition turns out to be essentially correct, we show that models with small amounts of friction have other untenable implications. We conclude that the theoretical case for Ricardian equivalence remains tenuous.
Keywords: Fiscal Policy; Intergenerational Altruism; Ricardian Equivalence
JEL Codes: D91; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introducing frictions into intergenerational altruism (D15) | restore approximate Ricardian equivalence (D50) |
| friction diminishes strong neutrality results of fiscal policy (E62) | does not significantly alter Ricardian outcome (F11) |
| increase in an individual's wealth (D14) | may not lead to Pareto improvements (D61) |
| in large populations, effects of wealth injections dissipate (E21) | effects of fiscal policies are localized (H30) |
| increase in population (J11) | marginal propensity to consume out of wealth declines (E21) |