Loved your explanation. However, some questions still persist. 1. What is actually stopping households from moving their intertemporal constraint? Is it their rationality in anticipating government actions of raising the taxes in future? What will happen when households can't predict government actions rationally? 2. Can there be a higher optimum where future consumption is lesser than anticipated in the initial period and current consumption is higher than the ex ante lowering of taxes? If it is then can it not be reached by a parallel shift in inter temporal constraint? 3. Why are the household only focused on reaching the earlier optimum point? If the optimum point changes will Ricardian equivalence be violated?
Thank you for your positive feedback and the questions! If the preferences of households or their income change, then the optimal point would also change. However, here one of the main assumptions is that preferences and income do not change. Then the result is that the initial optimal point can always be reached and there is no need for households to choose a different point that would be sub-optimal. Of course, if preferences and income are allowed to change, then different points would be optimal. Regarding the question on non-rationality: Yes, in such cases, Ricardian equivalence may fail.
Two questions: Why is everything discounted by (1+r)? Why (1+?) Second; why does the government have to increase T2 by the same amount it reduced T1? Can't the government earn income from other sources to offset lower T1? Why must people always assume a tax cut today will lead to a proportional tax hike tomorrow? What if the government borrowed money and invested it and increased capitals formation and earned higher capital receipts instead?
Regarding the first question: This is the discount factor, which is defined as 1+ the interest rate. If you only divide by r (without the 1+) then future consumption/taxes would even be higher than today's. Regarding the second question: There are many reasons why Ricardian equivalence could fail. Many of them are mentioned in the video. If the government were able to earn a higher return on investment than the interest rate at which it borrows, this would be another reason (the government could then even finance a permanent tax rebate via its stream of investment income).
@@KlausPrettner Thanks a lot for the explanation. Could you please redirect me to a video where you explain the discount factor and it's formula? Or if you haven't, can you please make a video about it explaining the math part too?
Probably the playlist on dynamic optimization would be useful in this regard: th-cam.com/play/PLHCd4G3qW92lVseRh84heyWbDy19O7f35.html There I discuss discrete-time and continuous-time models and also briefly explain the difference in dicount rates and discount factors in these settings. I hope this is helpful!
Thank you so much for these videos! Greetings from Chile
Thank you!
Professor, thank you for your help
Amazing video thank you so much for the explanation.
Thank you!
Thanks for the great video!
Loved your explanation. However, some questions still persist.
1. What is actually stopping households from moving their intertemporal constraint? Is it their rationality in anticipating government actions of raising the taxes in future? What will happen when households can't predict government actions rationally?
2. Can there be a higher optimum where future consumption is lesser than anticipated in the initial period and current consumption is higher than the ex ante lowering of taxes? If it is then can it not be reached by a parallel shift in inter temporal constraint?
3. Why are the household only focused on reaching the earlier optimum point? If the optimum point changes will Ricardian equivalence be violated?
Thank you for your positive feedback and the questions! If the preferences of households or their income change, then the optimal point would also change. However, here one of the main assumptions is that preferences and income do not change. Then the result is that the initial optimal point can always be reached and there is no need for households to choose a different point that would be sub-optimal. Of course, if preferences and income are allowed to change, then different points would be optimal.
Regarding the question on non-rationality: Yes, in such cases, Ricardian equivalence may fail.
@@KlausPrettner Thank you for the clarification and the prompt reply Professor.
Two questions: Why is everything discounted by (1+r)? Why (1+?)
Second; why does the government have to increase T2 by the same amount it reduced T1? Can't the government earn income from other sources to offset lower T1? Why must people always assume a tax cut today will lead to a proportional tax hike tomorrow? What if the government borrowed money and invested it and increased capitals formation and earned higher capital receipts instead?
Regarding the first question: This is the discount factor, which is defined as 1+ the interest rate. If you only divide by r (without the 1+) then future consumption/taxes would even be higher than today's.
Regarding the second question: There are many reasons why Ricardian equivalence could fail. Many of them are mentioned in the video. If the government were able to earn a higher return on investment than the interest rate at which it borrows, this would be another reason (the government could then even finance a permanent tax rebate via its stream of investment income).
@@KlausPrettner Thanks a lot for the explanation. Could you please redirect me to a video where you explain the discount factor and it's formula? Or if you haven't, can you please make a video about it explaining the math part too?
Probably the playlist on dynamic optimization would be useful in this regard:
th-cam.com/play/PLHCd4G3qW92lVseRh84heyWbDy19O7f35.html
There I discuss discrete-time and continuous-time models and also briefly explain the difference in dicount rates and discount factors in these settings. I hope this is helpful!
@@KlausPrettner Thanks a lot! Please keep making videos.
@@AkshatSharma1505 Thank you very much! I will.