The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Ricardian Equivalence Theorem

  • Andrew B. Abel
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1752

Abstract

The Ricardian equivalence theorem states that government bonds and lump-sum taxes are equivalent means to finance government spending. Thus, a lump-sum tax cut financed by the issuance of one-year government bonds would not affect consumption. Consumers could hold the newly issued bonds, and use them to pay the higher taxes when the government increases taxes to repay the principal and interest on the bonds. Intergenerational altruism implies that Ricardian equivalence holds even if the recipients of a tax cut die before future taxes are increased to fully repay the bonds. This article explores situations where Ricardian equivalence does or does not hold.

Keywords

Adverse selection Altruism Annuities Bequest motive Bequests Bonds Capital accumulation Consumption function Gift motive Insurance markets Intergenerational altruism Life insurance Liquidity constraints Lump-sum taxes Mortality National income determination Pensions Precautionary savings Public debt Ricardian equivalence theorem Taxation Wealth 

JEL Classifications

E6 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Andrew B. Abel
    • 1
  1. 1.