Deficit Follies / Johannes Brumm, Xiangyu Feng, Laurence J. Kotlikoff, Felix Kubler.

Format:

Book

Author/Creator:

Brumm, Johannes.

Contributor:

National Bureau of Economic Research.

Feng, Xiangyu.

Kotlikoff, Laurence J.

Kubler, Felix.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28952.

NBER working paper series no. w28952

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

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.

Notes:

Print version record

June 2021.