Defaultnomics:Making Sense of the Barro-Ricardo Equivalence in a Financialized World

Lorenzo Esposito, Giuseppe Mastromatteo

Risultato della ricerca: Contributo in libroContributo a convegno

Abstract

The 2008 crisis created a need to rethink many aspects of economic theory, including the role of public intervention in the economy. On this issue, we explore the Barro-Ricardo equivalence, which has played a decisive role in molding the economic policies that fostered the crisis. We analyze the equivalence and its theoretical underpinnings, concluding that: (1) it declares, but then forgets, that it does not matter whether the nature of debt and investment is public or private; (2) its most problematic assumption is the representative agent hypothesis, which does not allow for an explanation of financialization and cannot assess dangers coming from high levels of financial leverage; (3) social wealth cannot be based on any micro-foundation and is linked to the role of the state as provider of financial stability; and (4) default is always the optimal policy for the government, and this remains true even when relaxing many equivalence assumptions. We go on to discuss possible solutions to high levels of public debt in the real world, inferring that no general conclusions are possible and every solution or mix of solutions must be tailored to each specific case. We conclude by connecting different solutions to the political balance of forces in the current era of financialization, using Italy (and, by extension, the eurozone) as a concrete example to better illustrate the discussion.
Lingua originaleEnglish
Titolo della pubblicazione ospiteinserire titolo
Pagine0-66
Numero di pagine67
Volume2019
Stato di pubblicazionePubblicato - 2019
EventoBRE equivalence - MILANO -- ITA
Durata: 1 gen 20193 lug 2019

Serie di pubblicazioni

NomeWORKING PAPER

Seminario

SeminarioBRE equivalence
CittàMILANO -- ITA
Periodo1/1/193/7/19

Keywords

  • Barro Ricardo equivalence
  • default

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