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Ricardian Equivalence and Money Dominated in Return: Are They Mutually Consistent Generally?

Staff Report 99 | Published May 1, 1985

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photo of Neil Wallace

Neil Wallace

Ricardian Equivalence and Money Dominated in Return: Are They Mutually Consistent Generally?

Abstract

Different conclusions about the effects of open market operations are reached even among economists using full employment and rational expectations models. I show that these differences can be attributed to different assumptions regarding the concept of the deficit that is held fixed for an open market operation, the diversity among agents, and the features generating money demand. With regard to those features, I argue that plausible ways of explaining the holding of low-return money preclude the kind of perfect credit markets needed to obtain Ricardian equivalence.