Ricardo effect

This term is used to describe various phenomena. – The change in capital intensity in an economy depends on the market prices for labor and capital. – High government debt leads to a loss of confidence on the capital market. Interest rates rise there because a higher risk premium is included in the price of loan capital; also called the Barro effect in this sense. – If the government reduces its spending, the savings rate of private households falls because expenditures previously financed by government transfer payments now have to be paid for by private households themselves. – Above a certain level of government debt, the government’s policy of stimulating demand by increasing government spending comes to nothing. This is because companies and private households have the expectation that higher debt will be associated with an increase in taxes. They therefore hold back on spending. – See repression, financial, government debt, consumption-reducing. – Cf. ECB Monthly Bulletin, November 2006, p. 14 (referring to the meaning explained under ).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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