Finite lifetimes, long-term debt and the fiscal limit

Alexander Richter

Journal of Economic Dynamics and Control, 2015, vol. 51, issue C, 180-203

Abstract: The U.S. faces exponentially rising entitlement obligations. I introduce a fiscal limit—a point where higher taxes are no longer a feasible financing mechanism—into a Perpetual Youth model to examine how intergenerational redistributions of wealth, the average duration of government debt, and entitlement reform impact the consequences of explosive government transfers. Three key findings emerge: (1) Growing government transfers cause more severe and more persistent stagflation than in representative agent models that do not capture intergenerational transfers of wealth; (2) A longer average duration of government debt pushes the financing of government liabilities into the future and reduces the short-run impacts of explosive transfers; (3) The time it takes the economy to rebound from a period of growing transfers increases exponentially with the number of years it takes to pass entitlement reform.

Keywords: Finite lifetime; Long-term debt; Policy uncertainty; Fiscal limit; Entitlement reform (search for similar items in EconPapers)
JEL-codes: E43 E62 E63 H60 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: The Fiscal Limit and Non-Ricardian Consumers (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:51:y:2015:i:c:p:180-203

DOI: 10.1016/j.jedc.2014.10.008

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