Ricardian equivalence

Retail sales in Britain unexpectedly fell last month as consumers started tightening their belts ahead of the government’s austerity measures,

Fascinating. So, people do react now to future changes in income. Ricardian equivalence holds.

But, just at the time that we so obviously needed an economic stimulus

Therefore economic stimulus won\’t work because people do react now to future changes in income and Ricardian equivalence holds.

Now, as it happens, I don\’t think that Ricardian Equivalence does hold, certainly not for all people for all even foreseen changes in future income.

But it is something of an oddity to use proof of equivalence holding as proof that we should follow a course of action that won\’t work precisely because equivalence holds.

2 thoughts on “Ricardian equivalence”

  1. Could you explain this? Ricardian equivalence would suggest that consumers should have spent more in September, as they expected their future income to be higher due to the negative stimulus?

  2. We are approaching Christmas. Might people be… saving up?

    I have several problems with the Guardian article.

    The Guardian are reporting what ‘city experts’ expected. How often are they right? They were wrong the previous month for a start.

    The Guardian are reporting sales down and associating it with the spending review. We already knew roughly what was going to happen as it was in the June budget. At the very least correlation is not causation. Then you have the question of if people *have* tightened their belts were they doing it in preparation of the CSR or as a consequence of the June budget or for some other reason?

    A general gripe: What do the figures mean? There is no context given for the figures. I only know they are in comparison with the previous month because I’ve gone off and found them: Would it be the first link here?

    Retail sales up by volume and value on September last year. Retail sales up by value but down by volume on August this year. Detailed info show a drop in textiles, non-store retailing and a big drop in automotive fuel caused the reduction in volume compared to August. Would that be due to price rises? For some reason the Guardian article happens to make no mention of the automotive fuel figure that I can see.

    Taking the above into account I don’t have much confidence in the assertion the Guardian is making. The figures are too variable to make any definitive association with the spending review. Comparing September’s results with those gathered for August makes matters even less clear. The pattern of volume and value changes on the previous month are clearly different yet both August and September’s declines have been attributed to the spending review.

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