Lecture 152 Contents Main point of the Ricardian Equivalence Theorem (RET) Graphical and Algebraic Illustration of RET Numerical Example of RET Limitations of RET Deficit financing by printing money:Seigniorage Optimal Inflation tax rate Why governments like inflation tax? Dangers of excessive inflation
Lecture 153 Ricardian Equivalence: Main Proposition How important is a tax cut? Should government finance deficit by borrowing or by raising taxes? Ricardian Equivalence Theorem is after David Ricardo. British economist, who wrote about 180 years ago that it does not matter whether government finances its deficit by borrowing or taxes.
Lecture 154 Ricardian Equivalence: Main Proposition If it borrows now it raises tax in future for repayment of its debt. With more current debt private households save more in anticipation of higher taxes in the future that government will impose on them to repay the debt. Private households optimise intertemporally and completely internalise public policy. Borrowing only or tax only strategy does not matter if both the government and household honour their own inter temporal budget constraints.
Lecture 155 Basic Proposition of the Ricardian Equivalence Tax or Borrowing Does not Make Any Difference C1 C2 Before Borrowing Budget Constraint After borrowing budget constraint Today Tomorrow
Lecture 156 Model Economy for Ricardian Equivalence Theorem
Lecture 157 Tax Spending and Borrowing Strategies
Lecture 158 Optimisation for Ricardian Equivalence Theorem
Lecture 159 Conclusion of the Ricardian Equivalence Theorem
Lecture 1510 Numerical Proof of Ricardian Equivalence Theorem -1
Lecture 1511 Borrowing strategy: period 1 borrowing of 30
Lecture 1512 Limitations of Ricardian Equivalence Theorem
Lecture 1513 Deficit Financing by Printing Money
Lecture 1514 Inflation Tax: A Numerical Example
Lecture 1517 Exercises Does it make difference if the deficit if financed by more taxes or by more borrowing? Proof of Ricardian Equivalence Household utility with and without public goods Implications of borrowing from the private sector or the central bank How does inflation tax reduce the debt burden for governments?