Ricardian equivalence does not hold in reality, study finds
Researchers say consumers do not fully plan ahead for expected tax liabilities
Ricardian equivalence, an important assumption in many economic models, does not hold in the real world, research based on a new survey of consumers finds.
Martin Eichenbaum, Joao Guerreiro and Jana Obradovic present their findings in a working paper published this week by the US National Bureau of Economic Research.
As the authors note, Ricardian equivalence implies that changes in the fiscal deficit do not affect aggregate demand. It assumes that consumers will anticipate that a tax cut today
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