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Recent work demonstrates that dynastic assumptions guarantee the irrelevance of all redistributional policies, distortionary taxes, and prices-the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." In this paper, we investigate the possibility of reinstating approximate Ricardian equivalence by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction may dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. Although this intuition turns out to be essentially correct, we show that models with small amounts of friction have other untenable implications. We conclude that the theoretical case for Ricardian equivalence remains tenuous.
This is the peer reviewed version of the following article, which has been published in final form at http://dx.doi.org/10.2307/2938285. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Abel, A. B., & Bernheim, B. (1991). Fiscal Policy With Impure Integenerational Altruism. Econometrica, 59 (6), 1687-1711. http://dx.doi.org/10.2307/2938285
Date Posted: 27 November 2017
This document has been peer reviewed.