One of the analytical problem with this model is that it does not allow for the possibility that debt will be paid off such as money creation, higher corporate taxes and economic growth that increase tax revenues without raising asset sales or individual taxes to foreign investors. It is not clear why rational consumers would not consider these possibilities. Also that the assumptions are restrictive. The most basic test of Ricardian equivalence use to compare the change of government expenditure and household savings.
Fiscal Policy was Effective
The Keynesian View
This case for fiscal policy effectiveness was made by Ito (2000), when short-term nominal interest rates had propinquity zero. Simultaneously, the economy was in a liquidity trap, the LM curve horizontal and the demand for money perfectly interest-elastic. Conversely, the interest reductions had not stimulated investment, that investment was IS curve vertical and perfectly interest-inelastic. Thus without any crowding out, monetary policy would be ineffective and fiscal policy unusually effective. Hence Ito advocated further fiscal stimulation as being effective in such a zero interest environment. About a horizontal LM curve, it is describing the case of short-term nominal interest rates that have decline to low levels that they do not fall further. During the period of 1990s interest rates really decline steadily, Ito restricts his argument to time periods that exclude the entire period. .
An empirical evaluation of the effectiveness of fiscal policy also depends on the size of the expected impact of fiscal expenditures. Y1trn of fiscal expenditures would result in a increase in economic activity larger than Y1trn, While the Keynesian model implies a â€˜multiplierâ€™. Many proponents of fiscal policy effectiveness have adopted a far more cautious approach to fiscal policy effectiveness. Many private sector economists and government argued that a public works project worth Y1trn would increase nominal GDP by Y1trn to estimate the expected impact of fiscal policy. A spending package amounting to 2% of GDP was commonly expected to increase GDP by 2 percentage points. About the empirical evidence, Posen (1998) argues that in the period of 1990s, fiscal policy has been effective in Japan. In his view, actual fiscal spending has been smaller than the headline figures for the packages. He argues that fiscal spending has not been enough large to stimulate the economy. A suitably sized fiscal expansion would have been effective in ending economic stagnation and deflation. However, actual GDP-based expenditure data or statistics for the government borrowing requirement yield reasonably accurate measures of the fiscal stance. Also, Posen provides no such empirical test of fiscal policy effectiveness. We found that sizeable fiscal stimulation failed to stimulate the economy. Furthermore, there is no evidence that even the first-round effect resulted from the spending.(责任编辑：BUG)