14.451 Lecture Notes Economic Growth

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4.3 Fiscal Policy 4.3.1 Ricardian Equilivalence George-Marios Angeletos • The intertemporal budget for the representative household is given by where and a0 = k0 + b0. ∞X t=0 x0 =(1+R0)a0 + qtct ≤ q0x0 ∞X t=0 qt q0 [wtlt − Tt] • On the other hand, the intertemporal budget constraint for the government is ∞X qtgt + q0(1 + R0)b0 = • Substituting the above into the formula for x0, we infer t=0 x0 =(1+R0)k0 + ∞X ∞X t=0 qtTt ∞X qt qt wtlt − gt q0 q0 t=0 t=0 That is, aggregate household wealth is independent of either the outstanding level of public debt or the timing of taxes. • We can thus rewrite the representative household’s intertemporal budget as ∞X qt[ct + gt] ≤ q0(1 + R0)k0 + t=0 ∞X t=0 qtwtlt Since the representative agent’s budget constraint is independent of either b0 or {Tt} ∞ t=0, his consumption and labor supply will also be independent. But then the resource constraint implies that aggregate investment will be unaffected as well. Therefore, the 94
14.451 Lecture Notes aggregate path {ct,kt} ∞ t=0 is independent of either b0 or {Tt} ∞ t=0. All that matter is the stream of government spending, not the way this is financed. • More generally, consider now arbitrary preferences and endogenous labor supply, but suppose that the tax burden and public debt is uniformly distributed across households. Then, for every individual j, effective wealth is independent of either the level of public debt or the timing of taxes: ∞X x j 0 =(1+R0)k j 0 + t=0 qt q0 ∞X wtl j t − t=0 Since the individual’s intertemporal budget is independent of either b0 or {Tt} ∞ t=0, her optimal plan {c j t,l j t,a j t} ∞ t=0 will also be independent of either b0 or {Tt} ∞ t=0 for any given price path. But if individual behavior does not change for given prices, markets will continue to clear for the same prices. That is, equilibrium prices are indeed also independent of either b0 or {Tt} ∞ t=0. We conclude Proposition 21 Equilibrium prices and allocations are independent of either the intial level of public debt, or the mixture of deficits and (lump-sum) taxes that the government uses to finance governement spending. • Remark: For Ricardian equivalence to hold, it is critical both that markets are complete (so that agents can freely trade the riskless bond) and that horizons are infinite (so that the present value of taxes the household expects to pay just equals the amount of public debt it holds). If either condition fails, such as in OLG economies or economies with borrowing constraints, Ricardian equivalence will also fail. Ricardian equivalence may also fail if there are 95 qt q0 gt,
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14.451 Lecture Notes Economic Growt
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Contents Preface ix 1 Introduction
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14.451 Lecture Notes 3.1.4 OptimalC
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14.451 Lecture Notes 5.2 SomeExampl
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Preface This is the set of lecture
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Chapter 1 IntroductionandGrowthFact
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14.451 Lecture Notes 1.2 The World
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14.451 Lecture Notes • Figure 4 3
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14.451 Lecture Notes 9. Openness: I
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Chapter 2 The Solow Growth Model (a
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14.451 Lecture Notes • We say tha
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14.451 Lecture Notes 2.1.3 The Reso
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whereas consumption is given by 14.
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14.451 Lecture Notes where the latt
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14.451 Lecture Notes 2.2 Decentrali
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14.451 Lecture Notes • Let K m t
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Equivalently, 14.451 Lecture Notes
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14.451 Lecture Notes where Kt ≡ R
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14.451 Lecture Notes Proof. Follows
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14.451 Lecture Notes • Combining
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14.451 Lecture Notes We would expec
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• Straightforward algebra gives W
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14.451 Lecture Notes • Suppose th
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2.6 Miscellaneous 14.451 Lecture No
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14.451 Lecture Notes 2.6.3 Introduc
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Chapter 3 The Neoclassical Growth M
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Page 57 and 58: Equivalently, taking (kt,kt+2) as g
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Page 71 and 72: 14.451 Lecture Notes where f(k) ≡
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Page 83 and 84: 14.451 Lecture Notes • The ˙c =0
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Page 87 and 88: 14.451 Lecture Notes • We conclud
Page 89 and 90: where At denotes TFP. Note that 14.
Page 91 and 92: 14.451 Lecture Notes • Note that
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Page 95 and 96: Chapter 4 Applications 4.1 Arrow-De
Page 97 and 98: 14.451 Lecture Notes bles. We can t
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Page 109 and 110: Chapter 5 Overlapping Generations M
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Page 115 and 116: where the scalar ζ>0 is given by 1
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Page 147 and 148: 7.2.2 The Value of Innovation 14.45
Page 149 and 150: 14.451 Lecture Notes It follows tha
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