When Interest Rates Go Low, Should Public Debt Go High?

Johannes Brumm, Xiangyu Feng, Laurence Kotlikoff and Felix Kubler

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 4, 432-69

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 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.

JEL-codes: E43 E62 F41 H55 H63 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/mac.20230154

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