Fiscal Policy with Impure Intergenerational Altruism.

Recent work demonstrates that dynastic assumptions guarantee the irrelevance of redistributional policies, distortionary taxes, and prices--the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." This paper investigates the possibility of reinstating approximate Ricardian equivalence by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction may dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. However, models with friction have other untenable implications and, thus, the theoretical case for Ricardian equivalence remains tenuous. Copyright 1991 by The Econometric Society.