The age-specific burdens of short-run fluctuations in government spending

The age-specific burdens of short-run fluctuations in government spending We study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households, Ricardian households and rule-of-thumb consumers. We demonstrate that an unexpected increase in government spending decreases income and wealth inequality. In contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations, we find that debt-financing also harms Ricardian households during retirement. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Dynamics and Control Elsevier

The age-specific burdens of short-run fluctuations in government spending

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Publisher
Elsevier
Copyright
Copyright © 2018 Elsevier B.V.
ISSN
0165-1889
eISSN
1879-1743
D.O.I.
10.1016/j.jedc.2018.01.041
Publisher site
See Article on Publisher Site

Abstract

We study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households, Ricardian households and rule-of-thumb consumers. We demonstrate that an unexpected increase in government spending decreases income and wealth inequality. In contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations, we find that debt-financing also harms Ricardian households during retirement. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.

Journal

Journal of Economic Dynamics and ControlElsevier

Published: May 1, 2018

References

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