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The age-specific burdens of short-run fluctuations in government spending

Burkhard Heer () and Christian Scharrer ()

Journal of Economic Dynamics and Control, 2018, vol. 90, issue C, 45-75

Abstract: We study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households, Ricardian households and rule-of-thumb consumers. We demonstrate that an unexpected increase in government spending decreases income and wealth inequality. In contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations, we find that debt-financing also harms Ricardian households during retirement. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.

Keywords: Fiscal policy; Debt financing; Income and wealth distribution; Rule-of-thumb consumers; Ricardian households; Overlapping generations (search for similar items in EconPapers)
JEL-codes: E62 E30 E12 E24 D31 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:90:y:2018:i:c:p:45-75