Working Paper: NBER ID: w2027
Authors: Willem H. Buiter
Abstract: Debt neutrality is said to occur if, given a program for public spending on current goods and services over time, the real equilibrium of the economy (private consumption, investment, relative prices, etc.) is independent of the pattern of government borrowing and lump-sum taxation over time. The paper brings together work of Blanchard on individual uncertain lifetimes and debt neutrality and Weil on population growth and debt neutrality. It is shown that there will be debt neutrality if and only if the sum of the rate of growth of population and the individual probability of death equals zero. If this condition holds, non-zero rates of growth of labor productivity will not destroy debt neutrality.
Keywords: debt neutrality; population growth; productivity growth; fiscal policy
JEL Codes: E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sum of the rate of population growth (n) and the individual's probability of death (x) (J11) | debt neutrality holds (H63) |
| sum of the rate of population growth (n) and the individual's probability of death (x) (J11) | debt neutrality does not hold (H69) |
| uncertain lifetimes (x > 0) (C41) | divergence between private sector and government discount rates (H43) |
| sum of the rate of population growth (n) and the individual's probability of death (x) equals zero (J11) | changes in productivity growth (it) do not affect debt neutrality (O49) |