David Ricardo - Ricardian Equivalence

Ricardian Equivalence

Another idea associated with Ricardo is Ricardian equivalence, an argument suggesting that in some circumstances a government's choice of how to pay for its spending (i.e., whether to use tax revenue or issue debt and run a deficit) might have no effect on the economy. Ricardo supports this proposition by noting that it is implied by intertemporal optimisation by tax-payers: only if tax-payers act irrationally (or capital markets are imperfect) will the proposition fail to be true. Ironically, while the proposition bears his name, he does not seem to have believed it. Economist Robert Barro is responsible for its modern prominence.