Government Debt and The Pigou Effect
Robert Barro argued that due to Ricardian Equivalence in the presence of an operative bequest motive the public is not fooled into thinking they are richer when the government issues bonds to them, because government bond coupons must be paid from increased taxation. Therefore, he said that:
- At the microeconomic level, the subjective level of wealth would be lessened by a share of the debt taken on by the national government.
- Bonds should not be considered as part of net wealth at the macroeconomic level.
- Therefore: There is no way for the government to create a "Pigou effect" by issuing bonds, because the aggregate subjective level of wealth will not increase.
Read more about this topic: Pigou Effect
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