Ricardian equivalence
The argument that households save a debt-financed tax cut in full, anticipating the future taxes needed to repay it, so aggregate demand is unchanged. It holds only under strict assumptions.
Where you will meet it
Ricardian equivalence appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain the lags and constraints that limit fiscal policy
“Beyond timing, government borrowing can crowd out private investment by raising interest rates, and Ricardian equivalence argues that households save a tax cut in anticipation of the future taxes needed to repay it.”
- Explain how fiscal and monetary policy work together or against each other
“The interaction can weaken either tool: Ricardian equivalence means households may save a debt-financed tax cut, a liquidity trap blunts monetary easing and leaves fiscal policy doing the work, and fiscal dominance, where a central bank buys government debt to hold borrowing costs down, threatens its commitment to price stability.”
See also
Practise it
Practise ricardian equivalence until it is automatic: questions that explain every wrong option.
Take the free diagnostic →