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government's budgetary deficits plagued the world and was the main policy concern for many. Ricardian equivalence shed light on these adjustments towards equilibrium. The phenomenon dubbed as the ‘ expansionary fiscal contractions' in the 1990's for some European countries can be explained as ricardian effects of a reduction in present value of future taxes needed to pay the increased level of government debt.

Now I shed some light on the scope of relevant academic literature with reference to key works providing theoretical and empirical criticisms/acclaim for this equivalence theory. With critical insight and reflections towards barro's work which would be the model that will be used further in my paper.

Roberto Ricutti mentions that governments like the households face a maximisation problem with respect to their intertemporal Budget constraint. Which basically translates to the fact that in the short and medium time horizon the government can run a high deficit but in the longer run they cannot play a Ponzi game i.e. it cant attract new lenders with promises of high rates of interest and pay the previous debt with their money and so on. As long as the government obeys this IGBC (Intertemporal Government Budget Constraint) Ricardian equivalence would hold.

A lot of the criticisms for ricardian Equivalence have been made using the theoretical assumptionsof this theory as the basis. Bernheim and Bagwell(1988) suggested that the ‘ reductio ad absurdum' is the major theoretical objection to the equivalence theory. Barro's framework shows families interwoven vertically and horizontally thus each individual belongs to many dynastic groupings . This mesh of linkages makes and redistributive policies, and taxations by the government act as if they were just another lumpsum tax and the neutrality result holds. Even prices play no role in this allocative process. The non existence of such extreme neutrality in reality undermines the theory and its theoretical underpinnings.

Blanchard (1985) also points out that a reason for the non equivalence is that the rates of discount rates for governments and consumers. The consumers discount rate is greater than that of the government. He uses a finite life model to show this result.

Kotlikoff(1990) points out that bequest provision is not jus attributed to altruism , but there can be other bequest motives. One type can be strategic in nature where parents decide to elicit their care on their children when they are old or if the behaviour of the children is not nice they can take away or reduce the bequest. Adreoni(1989) mentions that the warm-glow effect will always dominate altruism and Keynesian effects of debt will be existant. The reason being that descendants consumption would be regarded as a public good with in the family.

Another reason sheds light on the non equivalence of borrowing and lending rates in the economy. Taking example of the case where borrowing interest rate exceeds the lending rate the extra money via the tax decrease would be used in some amount to increase spending as the issuance of debt is just like the government giving them a choice between current and future consumption at a better rate than that present in the market. In contrast to this in 1987 Hayashi proves that neutrality would hold in the presence of some borrowing constraints arising from adverse selection in the credit market