Ricardo-Barro Effect

Ricardo-Barro Effect,

Definition of Ricardo-Barro Effect:

  1. While the Ricardo-Barro effect was developed by David Ricardo in the 19th century, it was revised by Harvard professor Robert Barro into a more elaborate version of the same concept. His theory stipulates that a person's consumption is determined by the lifetime present value of his after-tax income—their intertemporal budget constraint.

  2. The Ricardo-Barro effect, also known as Ricardian equivalence, is an economic theory that suggests that when a government tries to stimulate an economy by increasing debt-financed government spending, demand remains unchanged, because the public increases their saving to pay for expected future tax increases that will be used to pay off the debt.

  3. A theory in economics that assumes an increase in government spending plans reduces the demand for loan-able funds. It suggests that when there is a reduction in government spending and increase in tax, there will be an increase in household and firm savings and a reduction in individual spending, which can have detrimental effect on a countrys economy growth.

Meaning of Ricardo-Barro Effect & Ricardo-Barro Effect Definition