Finite Horizons, Infinite Horizons, and Stock Prices

Part of the Central Issues in Contemporary Economic Theory and Policy book series (CICETP)


In conventional macroeconomic analysis, government budget deficits raise perceived wealth and stimulate aggregate demand in part because households are modeled as having finite horizons. If households are instead modeled as having infinite horizons, budget deficits need not stimulate aggregate demand and hence need not affect output, employment, asset prices, and the price level. The reason is that households with infinite horizons do not view the government debt as net wealth and hence may regard budget deficits (i.e., deferred taxes) and current taxes as equivalent. Ricardian equivalence is said to hold if households behave in this fashion (1).


Stock Price Insurance Market Budget Deficit Government Debt Liquidity Constraint 
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Copyright information

© SIPI Srl. Rivista di Politica Economica 1993

Authors and Affiliations

  1. 1.Ohio State UniversityUSA

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