User talk:Yaniogiza

Ricardian equivalence
The Ricardian equivalence proposition (also known as the Ricardo–de Viti–Barro equivalence theorem) is an economic hypothesis holding that consumers are forward-looking and so internalize the government's budget constraint when making their consumption decisions. 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

Governments can finance their expenditures by creating new money, by levying taxes, or by issuing bonds. Since bonds are loans, they must eventually be repaid—presumably by raising taxes in the future. The choice is therefore "tax now or tax later."

Suppose that the government finances some extra spending through deficits; i.e. it chooses to tax later. According to the hypothesis, taxpayers will anticipate that they will have to pay higher taxes in future. As a result, they will save, rather than spend, the extra disposable income from the initial tax cut, leaving demand and output unchanged.

David Ricardo was the first to propose this possibility in the early nineteenth century; however, he was unconvinced of its empirical relevance. Antonio de Viti de Marco elaborated on Ricardian equivalence in the 1890s. Robert J. Barro took the question up independently in the 1970s, in an attempt to give the proposition a firm theoretical foundation.

Ricardo and war bonds

In "Essay on the Funding System" (1820), Ricardo studied whether it makes a difference to finance a war with £20 million in current taxes or to issue government bonds with infinite maturity and annual interest payment of £1 million in all following years financed by future taxes. At the assumed interest rate of 5%, Ricardo concluded that in terms of spending the two alternatives amounted to the same value. However, Ricardo himself doubted that this proposition had practical consequences. He followed up the initial exposition with a claim that individuals do not actually evaluate taxes in such a manner and, in particular, take myopic view of the tax path.

Ricardo–de Viti–Barro equivalence

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). Barro's model assumed the following:

families act as infinitely lived dynasties because of intergenerational altruism

capital markets are perfect (i.e., all can borrow and lend at a single rate)

the path of government expenditures is fixed

Under these conditions, if governments finance deficits by issuing bonds, the bequests that families grant to their children will be just large enough to offset the higher taxes that will be needed to pay off those bonds. Among his conclusions, Barro wrote: Yaniogiza (talk) 16:56, 2 January 2024 (UTC)