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On the role of public debt in an OLG model with endogenous labor supply

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  • Lopez-Garcia, Miguel-Angel

Abstract

This paper argues that some propositions reported in a recent paper by [Fanti., L., Spataro, L., 2006. Endogenous labor supply in Diamond's (1965) OLG model: A reconsideration of the debt role. Journal of Macroeconomics 28, 28-438] are not warranted. They claim that including an endogenous labor supply in an overlapping generations model may change the conclusions concerning the capital accumulation and welfare effects of (internal) public debt issue. We show that their results are not the consequence of the Cobb-Douglas preferences they posit, but of a rather incomplete development of their model. When this incompleteness is corrected, and under general assumptions on preferences and technology, the propositions arrived at originally by [Diamond, P.A., 1965. National debt in a neoclassical growth model. American Economic Review 55, 1126-1150] in a model that does not take the labor-leisure decision into account continue to hold. In particular, no matter whether the starting point is a dynamically efficient or inefficient steady state, an increase in the stock of public debt per taxpayer unambiguously depresses the capital-labor ratio and raises the interest rate. Moreover, the welfare level will increase (decrease) when the starting point is a dynamically inefficient (efficient) steady state.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 3 (September)
Pages: 1323-1328

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1323-1328

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Web page: http://www.elsevier.com/locate/inca/622617

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Cited by:
  1. Andreas Bachmann & Kaspar W├╝thrich, 2013. "Evaluating pay-as-you-go social security systems," Diskussionsschriften dp1310, Universitaet Bern, Departement Volkswirtschaft.
  2. Bhattacharya, Joydeep & Andersen, Torben M, 2012. "Unfunded Pensions and Endogenous Labor Supply," Staff General Research Papers 34912, Iowa State University, Department of Economics.
  3. Peter Skott & Soon Ryoo, 2013. "Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate," UMASS Amherst Economics Working Papers 2013-10, University of Massachusetts Amherst, Department of Economics.
  4. Kuhle, Wolfgang, 2012. "Dynamic efficiency and the two-part golden rule with heterogeneous agents," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 992-1006.
  5. Peter Skott & Soon Ryoo, 2012. "Public Debt and Functional Finance in an OLG Model with Imperfect Competition," UMASS Amherst Economics Working Papers 2012-10, University of Massachusetts Amherst, Department of Economics.

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