Working Paper: CEPR ID: DP7941
Authors: Francisco J. Gomes; Alexander Michaelides; Valery Polkovnichenko
Abstract: We utilize an overlapping generations model with endogenous production and incomplete markets to quantify the distortionary costs associated with financing the increase in government expenditures directed to investments in the private sector in 2008 and 2009 (a.k.a. ?the bailout?), and its differential impact on different groups of the population (in the U.S.A.). In our baseline calibration, this distortion corresponds to a loss of approximately $300 billion dollars in total household consumption. For plausible alternative assumptions regarding both the expected and actual duration of this increase in expenditures, or the willingness of foreign institutions and/or investorsin absorbing additional government debt, this number can increase to $800 billion. We find that the cost falls more dramatically on those households which are either older and/or wealthier. Retirees face approximately 50% of the cost, as younger agents are more likely to stillbe alive when the economy has returned to its steady-state. Across wealth groups, the top 25% of the wealth distribution bears almost two thirds of the cost.
Keywords: bailout; fiscal policy; government debt; incomplete financial markets; tax distortions
JEL Codes: E21; E62; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government expenditures (H59) | Household consumption (D10) |
| Government expenditures (H59) | Distortionary costs (H31) |
| Increased government debt (H69) | Distortionary costs (H31) |
| Taxation required to finance investments (H29) | Distortionary costs (H31) |
| Government expenditures (H59) | Long-term negative impact on capital accumulation (E22) |
| Government expenditures (H59) | Long-term negative impact on overall consumption (E21) |
| Crowding out effects (E62) | Diminished consumption over time (D15) |
| Retirees (J26) | Total cost borne (H22) |
| Top 25% of wealth distribution (D31) | Total consumption loss (E21) |