Simulating the Blanchard Conjecture in a Multiperiod Life Cycle Model

Jasmina Hasanhodzic

AEA Papers and Proceedings, 2020, vol. 110, 149-51

Abstract: In recent writings, Olivier Blanchard has suggested that when the safe rate on government debt is less that the economy's growth rate, additional deficit-financed US federal spending would come at no cost to any future generation and benefits to some. This paper studies this question in a ten-period OLG CGE model with aggregate risk, whose safe rate averages -2 percent annually and growth rate is 0. It shows that welfare losses to future generations resulting from the introduction of pay-go social security, financed with a 15 percent payroll tax, are roughly 20 percent measured as a compensating variation relative to no policy.

JEL-codes: D58 E23 E43 H55 H63 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1257/pandp.20201105

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