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Government Debt and Social Security in a Life-Cycle Economy

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  • Gertler, Mark

Abstract

This paper develops a tractable overlapping generations model that is useful for analyzing both the short and long run impact of fiscal policy and social security. It modifies the Blanchard (1985)/Weil (1987) framework to allow for life/cycle behavior. This is accomplished by introducing random transition from work to retirement, and then from retirement to death. The transition probabilities may be picked to allow for realistic average lengths of life, work and retirement. The resulting framework is not appreciably more difficult to analyze than the standard Cass/Koopmans one sector growth model: Besides the capital stock, there is only one additional state variable: the distribution of wealth between workers and retirees. Under reasonable parameter values, government debt and social security have significant effects on capital intensity.

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Bibliographic Info

Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 97-14.

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Length: 41 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:cvs:starer:97-14

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Keywords: Overlapping Generations Model; government debt; social security;

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References

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  1. Jagadeesh Gokhale & Laurence J. Kotlikoff & John Sabelhaus, 1996. "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 315-407.
  2. Farmer, Roger E A, 1990. "Rince Preferences," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 43-60, February.
  3. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
  4. John Y. Campbell & Robert J. Shiller, 1989. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
  5. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  6. 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.
  7. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
  8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  9. Romer, D., 1988. "What Are The Costs Of Excessive Deficits?," Papers 14, Princeton, Woodrow Wilson School - Discussion Paper.
  10. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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