Ricardian Consumers with Keynesian Propensities


Mankiw NG, Barsky R, Zeldes S. Ricardian Consumers with Keynesian Propensities. American Economic Review. 1986;76 (Sept) :676-691.


This paper examines Ricardian equivalence in a world in which taxes are not lump sum, but are levied on risky labor income. It shows that the marginal propensity to consume out of a tax cut, coupled with a future income tax increase, can be substantial under plausible assumptions. Indeed, the MPC out of a tax cut can be closer to the Keynesian value that ignores the future tax liabilities than to the Ricardian value that treats future taxes as if they were lump sum.

Last updated on 07/16/2012