Ricardian Equivalence

A theoretical proposition that rational households increase saving in anticipation of future tax hikes when the government runs a deficit, fully offsetting the stimulus effect of the deficit. If Ricardian equivalence held strictly, the fiscal multiplier on deficit-financed spending would be zero. Empirically Ricardian equivalence does not hold strictly -- households are not perfectly forward-looking, are credit-constrained, and may not expect to bear the future tax burden -- but a partial version of the effect helps explain why multipliers shrink when public debt and credibility concerns are high.

Lessons that use this term

• Fiscal Multipliers: Why $1 of Spending Isn't $1 of GDP

Related terms

10Y Treasury · Altman Z-Score · Asset Sensitivity · Basel III · Bond ETF · Bretton Woods

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