The Household Fallacy / Roger Farmer, Pawel Zabczyk.

Format:

Book

Author/Creator:

Farmer, Roger.

Contributor:

National Bureau of Economic Research.

Zabczyk, Pawel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24393.

NBER working paper series no. w24393

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We refer to the idea that government must 'tighten its belt' as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive.

Notes:

Print version record

March 2018.