Ricardo-Barro Effect

AAA

DEFINITION of 'Ricardo-Barro Effect'

A macroeconomic concept that postulates that when a government runs a budget deficit, households and firms will respond by increasing their level of savings. This behavior allows the aggregate savings of an economy to remain unchanged.

INVESTOPEDIA EXPLAINS 'Ricardo-Barro Effect'

Under the Ricardo-Barro theory, the government is likely to increase taxes in the future in order to repay the money being borrowed to finance a current budget deficit. As a result, households and firms will increase their current level of savings in order to afford to pay higher taxes in the future.

RELATED TERMS
  1. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  2. Government Purchases

    Expenditures made in the private sector by all levels of government, ...
  3. Fiscal Deficit

    When a government's total expenditures exceed the revenue that ...
  4. Federal Debt

    The total amount of money that the United States federal government ...
  5. Economics

    A social science that studies how individuals, governments, firms ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
Related Articles
  1. Economics

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  2. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  3. Bonds & Fixed Income

    A Look At National Debt And Government Bonds

    Learn the functions of the U.S. Treasury, and find out how and why it issues debt.
  4. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Investing

    What is the Ricardian vice?

    The Ricardian vice refers to abstract model-building and mathematical formulas with unrealistic assumptions. In simpler terms, the Ricardian vice is the tendency for economists to make and test ...
  6. Economics

    What do Keynes and Freidman have to do with fiscal and monetary policy?

    Find out how John Maynard Keynes and Milton Friedman influenced how modern economists and analysts think about fiscal and monetary policy.
  7. Economics

    What is the role of deficit spending in fiscal policy?

    Read about the role deficit spending can play in a government's fiscal policy, and learn why economists are torn about the efficacy of debt-related stimulus.
  8. Economics

    Who sets fiscal policy, the president or congress?

    Discover how fiscal policy is set in the United States, including how all three branches of government can affect a given policy proposal.
  9. Fundamental Analysis

    What are the most common issues with Serial Correlation in stocks?

    Read about the concept of serial correlation in stock returns, and learn why market analysts are divided about the efficacy of trading based on stock patterns.
  10. Economics

    Can state and local governments in the US run fiscal deficits?

    Discover why most state and local governments do not – or cannot – run fiscal deficits in the same manner as the U.S. federal government.

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center