AN ANALYSIS OF STABILITY IN A KEYNESIAN ECONOMY WITH RICARDIAN CONSUMERS

Ricardian behavior may increase the variance of consumption: A change in national income will change future tax liabilities endogenously; if consumers are Ricardian, consumption will change for this reason. This paper studies the effects of these changes on the stability of an economy with sticky prices. The analysis indicates that Ricardian tax discounting would tend to reduce macroeconomic stability.