Deficit Follies / Johannes Brumm, Xiangyu Feng, Laurence J. Kotlikoff, Felix Kubler.

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Brumm, Johannes

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w28952.Publication details: Cambridge, Mass. National Bureau of Economic Research 2021.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w28952 (Browse shelf(Opens below))	Not For Loan

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June 2021.

Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance.