TY  - JOUR
AU  - Bernheim,B. Douglas
TI  - Ricardian Equivalence:  An Evaluation of Theory and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2330
PY  - 1988
Y2  - March 1988
UR  - http://www.nber.org/papers/w2330
L1  - http://www.nber.org/papers/w2330.pdf
N1  - Author contact info:
B. Douglas Bernheim
Department of Economics
Stanford University
Stanford, CA 94305-6072
Tel: 650/725-8732
Fax: 650/725-5702
E-Mail: bernheim@stanford.edu
M1  - published as B. Douglas Bernheim. "Ricardian Equivalence: An Evaluation of Theory and Evidence," in Stanley Fischer, editor, "NBER Macroeconomics Annual 1987, Volume 2" The MIT Press (1987)

AB  - In evaluating the existing theory and evidence on Ricardian equivalence, it is essential to distinguish between the short run effects of government borrowing (primarily the potential for stimulating aggregate demand) and the long run effects (primarily the potential for depressing capital accumulation). I argue that the theoretical case for long run neutrality is extremely weak, in that it depends upon improbable assumptions that are either directly or indirectly falsified through empirical observation. In contrast, the approximate validity of short run neutrality depends primarily upon assumptions that have at least an aura of plausibility. Nevertheless, even in this case behavioral evidence weighs heavily against the Ricardian view. Efforts to measure the economic effects of deficits directly through aggregate data confront a number of problems which, taken together, may well be insuperable. It is therefore not at all surprising that this evidence has, by itself, proven inconclusive. Overall, the existing body of theory and evidence establishes a significant likelihood that deficits have large effects on current consumption, and there is good reason to believe that this would drive up interest rates. In addition, I find a complete lack of either evidence or coherent theoretical argument to dispute the view that sustained deficits significantly depress capital accumulation in the long run.
ER  -