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Debt, Death and Taxes

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  • Tatsuji Hayakawa
  • Paul Zak

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    Abstract

    Does the level of government debt affect living standards and if so, to what extent? We quantify the impact of the U.S. federal debt using an open economy overlapping generations model in which consumers have long but finite lifetimes. A demographic structure allows fiscal policy changes to have different effects on different agents, and reveals the linkages between public debt, output and international trade. We find that reducing the debt has relatively modest impacts on aggregates, while reducing government spending substantially raises U.S. incomes and welfare. Therefore, this paper contributes to the current debate regarding whether U.S. federal government budget surpluses should be used to retire government debt. Copyright Kluwer Academic Publishers 2002

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    File URL: http://hdl.handle.net/10.1023/A:1014699420402
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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 9 (2002)
    Issue (Month): 2 (March)
    Pages: 157-173

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    Handle: RePEc:kap:itaxpf:v:9:y:2002:i:2:p:157-173

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    Web page: http://www.springerlink.com/link.asp?id=102915

    Related research

    Keywords: debt; fiscal policy; overlapping generations; computable general equilibrium models;

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    1. Laurence Ball & N. Gregory Mankiw, 1995. "What do budget deficits do?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 95-119.
    2. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report 203, Federal Reserve Bank of Minneapolis.
    3. Robert J. Barro, 1989. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc.
    4. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
    5. Eisner, Robert, 1989. "Budget Deficits: Rhetoric and Reality," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 73-93, Spring.
    6. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
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    8. Evans, Paul & Karras, Georgios, 1994. "Are Government Activities Productive? Evidence from a Panel of U.S. States," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 1-11, February.
    9. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
    10. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    11. John A. Tatom, 1991. "Public capital and private sector performance," Review, Federal Reserve Bank of St. Louis, issue May, pages 3-15.
    12. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
    13. Alogoskoufis, George S, 1987. "On Intertemporal Substitution and Aggregate Labor Supply," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 938-60, October.
    14. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
    15. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    16. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
    17. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    18. John F. Helliwell, 1991. "Fiscal Policy and the External Deficit: Siblings, but not Twins," NBER Working Papers 3313, National Bureau of Economic Research, Inc.
    19. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
    20. Yellen, Janet L, 1989. "Symposium on the Budget Deficit," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 17-21, Spring.
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