Ricardian Equivalence
Ricardian equivalence says deficit-financed tax cuts do not raise demand if agents save the transfer to pay the future tax — debt and taxes are two labels on the same present-value burden.
Definition
If households are infinite-lived (or intergenerationally linked), taxes are lump-sum, and markets are complete, a tax cut today plus a later tax hike leaves lifetime wealth unchanged. Agents save the rebate. Empirically the assumptions fail, so the equivalence is a polar case, not a forecast.
Why it matters
It is the null against ‘stimulus always works.’ If a large share of agents are liquidity-constrained, deficits do move demand — the 2008 and 2020 rebates were a test.
Case
2020–21 US transfers were spent at high MPCs by the bottom of the distribution and saved by the top. Aggregate demand rose; Ricardian full-offset did not happen.
How to read it
Ask who received the transfer and whether they can borrow. Equivalence is a theorem about unconstrained dynasties, not paycheck households.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Are Government Bonds Net Wealth?Barro · 1974 · Journal of Political EconomyModern Ricardian equivalence.