Ricardian Equivalence Theorem

Discipline: Economics

Named by American economist Robert Barro (1944- ) after English economist David Ricardo (1772-1823), Ricardian equivalence theorem asserts that government deficits are anticipated by individuals who increase their saving because they realize that borrowing today has to be repaid later.

One of the theory's central points is that the individual can unravel government policy.

Also see: crowding out

Source:
D Ricardo, On the Principles of Political Economy and Taxation (London, 1817);
R Barro, 'Are Government Bonds Net Wealth?', Journal of Political Economy, vol. LXXXII (1974), 1095-175

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