Abstract

Government Debt as a Source of Non-Neutrality – A Contribution to the Ricardian Equivalence Theorem: A Generalization

Barro (1974) showed that an "operative bequest motive" implies the validity of the Ricardian equivalence theorem in models with overlapping generations. Michaelis (1989) proved that government is able to influence the operativeness of the bequest motive through fiscal policy management. Moreover, in spite of the bequest motive, government has the possibility of working toward the "golden rule" of capital accumulation through appropriate budgetary deficits or surpluses.

When presenting his evidence, Michaelis assumed for reasons of simplicity that both the consumer's utility function and the corporte-sector production function are of the Cobb-Douglas type. This contribution shows that the qualitative results obtained by Michaelis remain intact when assuming a relatively general and strictly concave utility function as well as a discretionary linear homogenous production function. As distinct from the Michaelis and other contributions, results are developed not only analytically, but also graphically. A simple diagramme is developed which determines the steady-state values of the interest rate and percapita bequest with the help of two curves. This diagramme allows to see at one glimpse (a) under what conditions the bequest motive is operative, (b) how its operativenes can be influenced by the choice of governmental policy parameters and (c) in what way government must shape its fiscal policy in order to work toward the golden rule of capital accumulation.