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The Extent of Departures from Debt Neutrality When Future Income is Uncertain

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A model of stochastic consumption behaviour over the life cycle is used to reconsider earlier conclusions by Barsky, Mankiw and Zeldes (“Ricardian Consumers with Keynesian Propensities”, American Economic Review, Vol. 76, No. 4 (1986), pp. 676–691) and Barro (“The Ricardian Approach to Budget Deficits”, Journal of Economic Perspectives, Vol. 3, No. 2 (1989), pp. 37–54) about the extent to which income uncertainty can induce departures from pure debt neutrality. The results suggest that Barro understates, and Barsky et al. overstate, the importance of income uncertainty in this context.

Document Type: Original Article


Affiliations: The University of Reading

Publication date: 1997-09-01

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