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On the needed quantity of government debt

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  • Kathryn Birkeland
  • Edward C. Prescott

Abstract

People are having longer retirement periods, and population growth is slowing and has even stopped in some countries. In this paper we determined the implications of these changes for the needed amount of government debt. The needed debt is near zero if there are high tax rates and the transfer share of gross national income (GNI) is high. But, with such a system there are huge dead-weight losses as the result of the high tax rate on labor income. With a savings system, a large government debt to annual GNI ratio is needed, as large as 5 times GNI, and welfare is as much as 24 percent higher in terms of lifetime consumption equivalents than the tax-and-transfer system.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 648.

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Date of creation: 2006
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Handle: RePEc:fip:fedmwp:648

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  1. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(2), pages 203-235, April.
  2. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  3. Ellen R. McGrattan & Edward C. Prescott, 2001. "Is the Stock Market Overvalued?," NBER Working Papers 8077, National Bureau of Economic Research, Inc.
  4. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report, Federal Reserve Bank of Minneapolis 203, Federal Reserve Bank of Minneapolis.
  5. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," American Economic Review, American Economic Association, vol. 93(2), pages 392-397, May.
  6. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 14-88, Wharton School Rodney L. White Center for Financial Research.
  7. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
  8. Robert W. Fogel, 2005. "Changes in the Physiology of Aging during the Twentieth Century," NBER Working Papers 11233, National Bureau of Economic Research, Inc.
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Cited by:
  1. Hillebrand, Marten, 2011. "On the role of labor supply for the optimal size of Social Security," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(7), pages 1091-1105, July.

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