How to avoid Ricardian neutrality?
If there is Ricardian neutrality, the fiscal deficit’s effects on demand are offset by a rise in the private sector savings rate. As households and companies expect an increase in the tax burden or a fall in government transfer payments in the future, they react by saving more today . Are we now seeing signs of Ricardian neutrality in the OECD countries that have switched to a more expansionary fiscal policy (United States, Germany, France, Italy)? The answer is yes for four countries. How to avoid Ricardian neutrality? The most efficient solution is to increase the fiscal deficit by increasing useful public investments that will generate additional income in the future. This additional income ensures fiscal solvency without any need to increase the tax burden or reduce public spending. Only Germany and Italy are currently increasing (very slightly) their public investment.