This article reconsiders the relationship between government debt and welfare in a two-country overlapping-generations model with lifetime uncertainty and international product differentiation. It has recently been proposed that a higher steady-state debt level may be welfare-enhancing in this setting. It is pointed out that this proposition does not adequately account for the effect of debt policy on individual agents’ intertemporal consumption profiles. While a higher debt may indeed raise aggregate steady-state consumption, the lifetime utility of all steady-state cohorts will actually drop, unless the elasticity of substitution between domestic output and imports is extremely low. These particular results illustrate a more general caveat pertaining to any normative policy analysis in settings with overlapping generations of intertemporally optimizing agents: Attempts to draw welfare inferences on the basis of comparisons of aggregate consumption paths can be misleading.
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Article provided by Economics Bulletin in its journal Economics Bulletin.
Volume (Year): 5 (2005) Issue (Month): 10 () Pages: 1-8 Download reference. The following formats are available: HTML,
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Handle: RePEc:ebl:ecbull:v:5:y:2005:i:10:p:1-8
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Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H6 - Public Economics - - National Budget, Deficit, and Debt
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