Show that the Ricardian Equivalence does not necessarily hold if the assumption of perfect credit markets is violated which means the consumers can be liquidity constrained (e.g. due to transaction cost). More precisely, demonstrate the problem in a situation when the interest rate depends on whether the household lends or borrows in the first period. Lenders get an interest rate is rL, while borrowers face an interest rate rB, with rB > rL. Government can also borrow at the lower interest rate.
Show that the Ricardian Equivalence does not necessarily hold if the assumption of perfect credit markets is violated which means the consumers can be liquidity constrained (e.g. due to transaction cost). More precisely, demonstrate the problem in a situation when the interest rate depends on whether the household lends or borrows in the first period. Lenders get an interest rate is rL, while borrowers face an interest rate rB, with rB > rL. Government can also borrow at the lower interest rate.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Show that the Ricardian Equivalence does not necessarily hold if the assumption of perfect credit markets is violated which means the consumers can be liquidity constrained (e.g. due to transaction cost). More precisely, demonstrate the problem in a situation when the interest rate depends on whether the household lends or borrows in the first period. Lenders get an interest rate is rL, while borrowers face an interest rate rB, with rB > rL. Government can also borrow at the lower interest rate.
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