Why does Ricardian Equivalence not hold when there are different borrowing and lending rates on the market?

Question

If you can propose any explanation (intuitive, graphical or algebraic), I will appreciate it

Answer 1

In Ricardo–de Viti–Barro equivalence, when taxes are too low to support current expenditures, they expect taxes to rise in the future and that the NPV of the future taxes exactly equal the amount by which taxes are lower today. Therefore, they save their reduced taxes in government bonds (reinvesting all proceeds) to ensure they have exactly the right amount of money to meet future tax burdens. In turn, the government, borrower the money with government bonds to meet the tax shortfall. However, if the rate at which the household can save is lower than the interest rate that the government borrows at, this does not work. They have to set aside an amount greater than their tax savings to pay future taxes, and then the household is no longer indifferent between taxes now and taxes later.

Answer 2

Barro helped define Ricardian equivalence, wherein one of the assumptions was that the capital market is perfect(can lend and borrow at a single rate). so it can be easily inferred that Ricardian equivalence does not hold true when borrowing and lending rates are different. and while it is assumed under Ricardian equivalence that consumers are able to save/ spend according to tax regimes, it is debatable, as was mentioned by Ricardo himself, that people may have a myopic approach towards tax regimes. although it holds credibility in some specific examples, the discounting of one of its basic assumptions can be the reason for it not holding true when borrowing and lending rates are different.

it would be more helpful if you could elaborate on the type of examples/statements you want to support your answer.

Answer 3

The financial gain isn't fit for purpose in an operational sense; I say debt is constitutional before deflation, yet complementary layoff are still deflation when accounting for whole life as pricing axis.

By a system of finance I do not mean the finances of the Crown, which consist in distributing among the citizens and utilizing those charges that are indispensable for the maintenance of the Crown and the state with the greatest security, the least confusion and the most equitable sharing of the burden, but the finances of the country, which should be carefully distinguished from the former and consist in the manner of establishing the coinage of the realm on such a footing as will best promote security and enterprise in all productive occupations, from which the country as a whole and each individual subject derive their proper increase and strength. [Anders (Antti) Chydenius, A Remedy for the Country, 1766]