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. Fundamental Analysis

    What is the affect of the invisible hand on consumers?

    Discover how consumers help initiate and benefit from the invisible hand of the market, which naturally coordinates trade in an exchange economy.
  7. Economics

    How does the invisible hand phenomenon affect investment markets?

    Read about how the invisible hand of the market coordinates investment markets and provides social benefit and why its effects are distorted along the way.
  8. Economics

    How does a bull market affect the economy?

    Find out why it can be difficult to prove any real causal link between rising stock market prices and a healthy, growing national economy.
  9. Fundamental Analysis

    What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and internal factors.
  10. Economics

    What impact does quantitative easing have on consumers in the U.S.?

    Dig deeper into the Federal Reserve's quantitative easing policies and what potential impacts they may have on American consumers.

You May Also Like

Hot Definitions
  1. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  2. Weather Insurance

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

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

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

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  6. 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 ...
Trading Center