Friday, March 11, 2011

Krugman on Ricardian Equivalence

A temporary (not permanent) increase in government spending now (let’s say for one or two years) does not call for a same amount of tax increases in all future periods, but a lower one as far as the tax burden is spread over many future periods.  In that case, the present cut in consumer spending should be less than the public spending increase and the program should have expansionary effects, even if you have full “Ricardian equivalence” behavior (perfect foresight of future fiscal consequences of present policy).

A short post here .

The result of course would be different if future tax increases were to be concentrated in the next few years rather than over an infinite series of future periods. 

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