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Simulating the Blanchard Conjecture in a Multiperiod Life Cycle Model

Author

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  • Jasmina Hasanhodzic

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.

Suggested Citation

  • Jasmina Hasanhodzic, 2020. "Simulating the Blanchard Conjecture in a Multiperiod Life Cycle Model," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 149-151, May.
    • Handle: RePEc:aea:apandp:v:110:y:2020:p:149-51
    DOI: 10.1257/pandp.20201105
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    Citations

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    Cited by:

    1. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2007. "A Balance-Sheet Approach to Fiscal Sustainability," Working Paper Series rwp07-044, Harvard University, John F. Kennedy School of Government.
    2. Federico Sturzenegger & Nicolás Der Meguerditchian, 2022. "A Balance-Sheet Model of Fiscal Policy in Namibia," Working Papers 136, Red Nacional de Investigadores en Economía (RedNIE).
    3. Eduardo Levy Yeyati & Federico Sturzenegger, 2023. "A balance‐sheet approach to fiscal sustainability," Fiscal Studies, John Wiley & Sons, vol. 44(1), pages 61-84, March.
    4. Michael Falkenheim, 2022. "The Welfare Effects of Debt: Crowding Out and Risk Shifting: Working Paper 2022-10," Working Papers 58849, Congressional Budget Office.

    More about this item

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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