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Debt, Deficits and Finite Horizons: The Stochastic Case

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  • Roger Farmer
  • Carine Nourry
  • Alain Venditti

Abstract

We introduce a solution technique for the study of discrete time stochastic models populated by long-lived agents. We introduce aggregate uncertainty and complete markets into a 'perpetual-youth' model of a kind first studied by Olivier Blanchard and we show that the pure-trade version of the model behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15025.

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Date of creation: Jun 2009
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Publication status: published as Farmer, Roger E.A. & Nourry, Carine & Venditti, Alain, 2011. "Debt, deficits and finite horizons: The stochastic case," Economics Letters, Elsevier, vol. 111(1), pages 47-49, April.
Handle: RePEc:nbr:nberwo:15025

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  1. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 223-47, April.
  2. Ganelli, Giovanni, 2003. "The New Open Economy Macroeconomics of Government Debt," Royal Economic Society Annual Conference 2003, Royal Economic Society 83, Royal Economic Society.
  3. Ganelli, G., 2000. "Useful Government Spending, Direct Crowding Out and Fiscal Policy Interdependence," The Warwick Economics Research Paper Series (TWERPS) 547, University of Warwick, Department of Economics.
  4. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, Elsevier, vol. 70(2), pages 428-450, December.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
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Cited by:
  1. Hippolyte d'Albis & Emmanuelle Augeraud-Véron, 2013. "Frequency of trade and the determinacy of equilibrium in economies of overlapping generations," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 85-100, 03.
  2. Farmer, Roger E A & Nourry, Carine & Venditti, Alain, 2013. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9283, C.E.P.R. Discussion Papers.
  3. Airaudo, Marco & Nisticò, Salvatore & Zanna, Luis-Felipe, 2012. "Learning, Monetary Policy and Asset Prices," School of Economics Working Paper Series, LeBow College of Business, Drexel University 2012-12, LeBow College of Business, Drexel University.

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