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

Johannes Brumm, Xiangyu Feng, Laurence Kotlikoff and Felix Kubler

No 28951, NBER Working Papers from National Bureau of Economic Research, Inc

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 question 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: H0 H2 H21 H22 H5 H6 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-opm
Note: AG EFG PE
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