Government debt refers to the money that a government owes to its citizens or to other entities. It is usually financed through borrowing from domestic or inter...
Government debt refers to the money that a government owes to its citizens or to other entities. It is usually financed through borrowing from domestic or international lenders or through issuing bonds.
The Ricardian equivalence states that a government's ability to borrow is equal to the amount of money that it is willing to pay in interest to its creditors. In other words, the government's debt is equal to the value of the interest payments that it makes to its creditors.
The Ricardian equivalence is a fundamental principle of macroeconomics and is used to determine the government's budget deficit and the appropriate level of interest rates. When the government's debt exceeds its willingness to pay in interest, it has a budget deficit, and interest rates will be lowered to encourage investment. Conversely, when the government's debt is lower than its willingness to pay in interest, interest rates will be raised to discourage investment