Why is there Ricardian equivalence in Ramsey's model, but not in OLG?
I am looking for an intuitive explanation.
1 Answer
$\begingroup$
$\endgroup$
Ricardian equivalence essentially means the timing of taxation doesn’t matter. Ramsey models are typically infinitely lived agent (or can be formulated as such) models with no heterogeneity. OLG models have age heterogeneity, so if people live for k periods an agent born in period 0 receiving a transfer in period t < k to be financed by a tax in period t+j, t+j > k, they don’t live to face the tax and the transfer is a permanent increase in income. Similarly, a person born in period k does not receive the transfer and views the tax as a permanent decrease in income. In an infinitely lived agent model (here a Ramsey model), the agent will always live to see both the transfer and the tax.
