Does Ricardian Equivalence hold when expectations are not rational?

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Title: Does Ricardian Equivalence hold when expectations are not rational?
Author: Evans, George W. ; Honkapohja, Seppo ; Kaushik, Mitra
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 13/2010
Year of publication: 2010
Publication date: 1.5.2010
Published in: Published in Journal of Money, Credit and Banking, 44. 7 (Oct 2012): 1259-1283
Pages: 25 s.
Keywords: valtionvelka; budjettivaje; rationaaliset odotukset; odotukset; säännöt; julkinen talous; verotus; oppiminen; Ricardolainen ekvivalenssi; Ramseyn malli
Abstract: This paper shows that the Ricardian Equivalence proposition can continue to hold when expectations are not rational and are instead formed using adaptive learning rules. In temporary equilibrium, with given expectations, Ricardian Equivalence holds under the standard conditions for its validity under rational expectations. Furthermore, Ricardian Equivalence holds for paths of temporary equilibria under learning provided suitable additional conditions on learning dynamics are satisfied. New cases of failure of the Ricardian proposition emerge under learning. Most importantly, agents expectations must not depend on government financial variables under deficit financing.
Note: Ilmestynyt myös CEPR DP 7792 v. 2010 sekä Journal of Money, Credit and Banking 2012 ; 44 ; 7.

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