Working Paper: NBER ID: w28951
Authors: Johannes Brumm; Xiangyu Feng; Laurence J. Kotlikoff; Felix Kübler
Abstract: Is deficit finance free when real borrowing rates are routinely lower than growth rates? Specifically, can the government make all generations better off by perpetually taking from the young and giving to the old? We study this question in stochastic closed- and open-economy OLG models. Unfortunately, Pareto gains are predicted only for implausible calibrations. Even then, the gains reflect improved intergenerational risk-sharing, improved international risk-sharing, and beggaring thy neighbor – not intergenerational redistribution per se. As we show, theoretically and quantitatively, low government borrowing rates suggest state-contingent, bilateral transfers between generations, not unconditional, unilateral redistribution from future to current generations.
Keywords: No keywords provided
JEL Codes: H0; H2; H21; H22; H5; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower real borrowing rates (E43) | improve welfare across generations (D69) |
| deficit finance (H62) | improve welfare across generations (D69) |
| improved intergenerational risk-sharing (D15) | source of gains (D33) |
| running deficits (H62) | redistribute resources from future to current generations (D15) |
| domestic deficits (H62) | crowd out global capital (F65) |
| domestic deficits (H62) | expand risk-sharing among generations (D15) |
| low average risk-free rates (G19) | signal presence of risk that can be shared (G22) |
| appropriate policy interventions (F68) | improve expected utility of future generations (D15) |
| state-contingent transfers (F16) | improve expected utility of future generations (D15) |