Master of Arts (MA)
Semester of Degree Completion
Minh Q. Dao
Ricardian equivalence is a topic which has attracted much attention in the economic journals in the past couple of decades. Economic theory states that a tax cut gives the public a greater disposable income. Thus, the public will consume more, and the economy will grow. However, if the tax cut is financed by debt, the public will perceive that a future tax increase is inevitable to pay off the debt. Under this scenario, the public will not consume more. Instead, they will save all of their increased disposable income in anticipation of the future tax increase. Ricardian equivalence then is that the value of the tax cut is equal to the present value of the future tax increase.
This paper tests Ricardian equivalence within the context of the Patinkin framework, using a single reduced-form equation. A regression analysis is performed on the interest rate using real GNP, real tax receipts, additional real public debt, the change in the price level, real government expenditures, and real money supply. This study finds that the data used for the time period 1975:1 to 1991:4 are consistent with that of Ricardian equivalence.
Moutray, Chad, "Ricardian Equivalence or the Indifference Between Tax and Debt Financing" (1992). Masters Theses. 2148.