Welfare Analysis of Debt Policy during Recessions
AbstractThis paper develops an overlapping-generations model with nominal wage rigidities and examines the welfare effects of debt policy when unemployment exists. Issues of public debt stimulate aggregate consumption demand and create employment. Future generations then face both increased wage incomes and higher taxes. If the amount of outstanding bonds is already large, debt policy deteriorates the welfare of future generations by levying heavy taxes. By contrast, if the outstanding bond issue is relatively small, debt policy can be Pareto improving by creating more employment. Therefore, the welfare implications of debt policy during recessions can be discriminated from those during booms.
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Bibliographic InfoPaper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0642.
Date of creation: Sep 2005
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