Fiscal Policy with Intertemporally Non-Separable Preferences

Abstract

In this paper, we show that Ricardian equivalence does not hold in a representative agent framework if one considers goods whose current consumption affect future marginal utilities. We find that, when the intertemporal elasticity of substitution changes over time, the timing of lump sum taxation has an asymmetric effect on current and future consumption. This in turn induces distinctive welfare consequences even if the government and individual budget constraints are unchanged in present value terms.

Deviant generations, Ricardian equivalence, and growth cycles

“…There is no indeterminacy of any kind; given λ, the equilibrium is unique. 12 Why can't the benchmark model economy support momentary equilibria where the non-negativity constraint on bequests binds occasionally? To understand the intuition, it suffices to understand, for example, why a old person never leaves a bequest if she did not receive an inheritance when young.…”

“…Also seeBossi and Porqueras (2010) who, in a somewhat different setting, make a case against Ricardian 3 that is not the case. Indeed, a unique equilibrium exists in which the bequest motive is operative at each date, provided the altruism factor is sufficiently high.…”

“…In the benchmark model, there may be a deviant generation at the initial date in a trivial sense. This may happen, if for example, the initial old leave a bequest but no other generation does 12. Each momentary equilibrium γ t+1 is indexed by the growth rate that precedes it, γ t .…”