What Is the Ricardian Equivalence?
Ricardian equivalence, sometimes called Barro-Ricardo equivalence, is a hypothesis used to suggest that deficit spending cannot stimulate the economy. The proposed equivalence is between taxes in the present and taxes in the future. According to Ricardian equivalence, deficit spending is equivalent to an immediate increase in taxes because participants in the economy will recognize that the deficit requires future taxes. The theory receives its name from David Ricardo, who suggested it in 1820. Ricardo himself, however, did not fully endorse the idea. The modern formulation was developed in 1974 by Robert Barro. Barro actively promoted the theory, and expressed it in a general form, stating that interest rates would not be affected by the distribution of deficit between debt and taxation.
