Ricardian Equivalence revisited: introductory notes

Abstract

These notes aim to revisit the debate, the model, the results, and main objections
to the validity of the Ricardian Equivalence Theorem as presented in Barro (1974). It
is intended to explore his thesis that tax and debt are equivalent and have no real effect on
perceived wealth, demand, the real interest rate or on the economy. The thesis refers to the
analysis of the ways of financing debt at a given level of government expenditure and does
not address the effects of an expansion of this volume of spending, nor it specifically analyzes
the effects of an increase in public debt due to a tax reduction policy. After this presentation,
the thesis is debated, consolidating some of the premises that are necessary to validate it. The purpose of the paper is to explore the first round of debates on the theme,
explaining the restrictions to which the Barro-Ricardo Theorem or the Ricardian Equivalence
Theorem is subject, based on the publications by Barro (1976), Buchanan (1976) and
Feldstein (1976), all of them within the ‘realm’ of economic orthodoxy. The final section
presents some remarks and an analysis of Barro’s later work (1989 and 1996).

JEL Classification: E00; E13; E21; E62.