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Pubic Debt and U.S. Saving: A New Test of the Neutrality Hypothesis

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  • Michael J. Boskin
  • Laurence J. Kotlikoff

Abstract

The substantial post war decline in the U.S. saving rate has added great impetus to the debate over whether public debt policy crowds out saving. Rather than attempting to reject specific saving models, empirical research on debt policy and savings has primarily focused on the impact of particular policy variables on savings. In this paper we examine Barro's infinite horizon, intergenerationally altruistic model. A distinguishing feature of this modelis that aggregate consumption depends only on collective resources and not the age distribution of resources.To test this proposition we specify the Barro model under earnings uncertainty, rate of return uncertainty, and demographic change and test whether, given the level of consumption predicted by this model, variables measuring the age distribution of resources influence actual consumption. Data on the age distribution of resources are primarily obtained from the annual Current Population Surveys. Our results imply a rejection of the hypothesis that aggregate consumption is independent of the age distribution of resources.They therefore cast doubt on the contention that government debt policy does not affect consumption and saving.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1646.

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Date of creation: Jun 1985
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Publication status: published as Boskin, Michael J. and Laurence J. Kotlikoff. "Public Debt and United States Saving: A New Test of the Neutrality Hypothesis." Carnegie-Rochester Conference Series on Public Policy, Vol. 23, (1985), pp. 55-86.
Handle: RePEc:nbr:nberwo:1646

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  1. Roger H. Gordon, 1982. "Social Security and Labor Supply Incentives," NBER Working Papers 0986, National Bureau of Economic Research, Inc.
  2. John Y. Campbell, 1987. "Bond and Stock Returns in a Simple Exchange Model," NBER Working Papers 1509, National Bureau of Economic Research, Inc.
  3. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Working Papers 0729, National Bureau of Economic Research, Inc.
  4. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April.
  5. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  7. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  8. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
  9. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  10. David, Martin & Menchik, Paul L, 1985. "The Effect of Social Security on Lifetime Wealth Accumulation and Bequests," Economica, London School of Economics and Political Science, vol. 52(208), pages 421-34, November.
  11. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
  12. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1156-57, December.
  13. Kotlikoff, Laurence J, 1979. "Social Security and Equilibrium Capital Intensity," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 233-53, May.
  14. David, Paul A & Scadding, John L, 1974. "Private Savings: Ultrarationality, Aggregation, and "Denison's Law."," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 225-49, Part I, M.
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