| Topic: | Business |
|---|---|
| Number of pages / Number of words: | 6 / 1462 |
They believe that agents choose consumption levels based purely upon their current disposable income and are ignorant to future tax burdens. Modigiani and Sterling supported this idea, declaring that ‘consumers are unable to distinguish taxes implied by government debt' .
Another assumption is that of perfect capital mobility market, whereby agents are able to borrow and save as much as they need and people must be able to borrow at the same interest rate at which the government borrows, or the equivalence breaks down...
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This thwarts agents from optimizing their behavior and may invalidate Ricardian Equivalence.
Thirdly, Ricardian equivalence can only hold when current agents know the exact timing of when taxes are to be collected. If an agent realizes that the government would collect taxes after they had died, than current consumption would in fact change as bonds would represent net wealth to those that are living (Diamond 1965) ...
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