Abstract
A 52-country macro-theoretic model is developed in order to test the Ricardian view that debt and tax finance are equivalent. The alternative traditional view is that government expenditures financed by tax revenue affect the economy in profoundly different ways than expenditures financed by bond issuance. A rigorous testing of the model indicates that a present value-preserving transfer of income from future generations affects the consumption of the current generations in a positive (for solvent countries) or negative (for debt-ridden countries) way. An explanation for this divergence in consumer's behaviour is attempted via the concept of debt illusion.
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