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Debt Policy in a Competitive Two-Sector Overlapping Generations Model

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  • Partha Sen

    (Delhi School of Economics)

Abstract

We analyse debt policy in a two-period, two-sector overlapping generations model with Leontief technologies. We find that debt, issued to transfer resources to the initially old, could be welfare improving in the new steady state for an economy which satisfies the usual conditions for dynamic efficiency viz. the rate of interest is at least as great as the population growth rate. Out of steady state, the only potential losers are the recipients of the transfer. This could happen if the interest rate were to fall sufficiently to offset the effect of the transfer. From generation one onwards everyone becomes better off (under reasonable asumptions). Contrast this with a one-sector model where the definite gainers are those who are alive on date one.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 137.

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Length: 18 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:cde:cdewps:137

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Keywords: Government Debt; Overlapping Generations; Two-Sector Models; Dynamic Efficiency.;

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  1. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  2. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2005. "The role of money in two alternative models: When is the Friedman rule optimal, and why?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(8), pages 1401-1433, November.
  3. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1351-86, November.
  4. Cremers, Emily, 2001. "General Equilibrium with Trade Balance and Real Interest Rate Parity," Staff General Research Papers 34859, Iowa State University, Department of Economics.
  5. Torsten Persson, 1983. "Deficits and Intergenerational Welfare in Open Economies," NBER Working Papers 1083, National Bureau of Economic Research, Inc.
  6. 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.
  7. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
  8. Ihori, Toshihiro, 1978. "The Golden Rule and the Role of Government in a Life Cycle Growth Model," American Economic Review, American Economic Association, American Economic Association, vol. 68(3), pages 389-96, June.
  9. Calvo, Guillermo A., 1978. "On the indeterminacy of interest rates and wages with perfect foresight," Journal of Economic Theory, Elsevier, Elsevier, vol. 19(2), pages 321-337, December.
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