Working Paper: NBER ID: w28952
Authors: Johannes Brumm; Xiangyu Feng; Laurence J. Kotlikoff; Felix Kubler
Abstract: Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance.
Keywords: No keywords provided
JEL Codes: E21; E6; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic risk (D81) | expected utility (D81) |
| progressive taxation (H29) | idiosyncratic risk (D81) |
| policy uncertainty (D89) | government borrowing rate (E43) |
| government borrowing rate (E43) | deficit finance (H62) |
| transaction costs (D23) | borrowing rates (G21) |
| transaction costs (D23) | lending rates (G21) |
| borrowing rates (G21) | deficit finance (H62) |
| lending rates (G21) | deficit finance (H62) |