Ricardian equivalence in the presence of capital market imperfections

Research output: Contribution to journalArticle

28 Citations (Scopus)

Abstract

It is a common claim that Ricardian equivalence fails if capital markets are imperfect. The validity of this claim is examined for the case of informationally imperfect capital markets. We present three alternative models of adverse selection and analyze the effects of debt finance in these models. It is shown that a debt-financed tax cut can lead to Pareto improvement in some cases. In the theoretically most preferable model, however, Ricardian equivalence survives in spite of genuine imperfections in the capital market. The results point to the importance of specifying the exact nature of imperfection.

Original languageEnglish
Pages (from-to)411-436
Number of pages26
JournalJournal of Monetary Economics
Volume20
Issue number2
DOIs
Publication statusPublished - 1987
Externally publishedYes

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Capital markets
Capital market imperfections
Imperfections
Ricardian equivalence
Pareto improvement
Debt finance
Adverse selection
Imperfect capital markets
Alternative models
Tax cuts
Debt

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Ricardian equivalence in the presence of capital market imperfections. / Yotsuzuka, Toshiki.

In: Journal of Monetary Economics, Vol. 20, No. 2, 1987, p. 411-436.

Research output: Contribution to journalArticle

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