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Welfare implications of national debt in a OLG model with endogenous fertility

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  • Luciano fanti
  • Luca Spataro

Abstract

In the present work we show that, when one allows for endogenous fertility in Diamonds (1965) OLG model, public debt plays still a clear-cut role on dynamic inefficiency (DI): for correcting DI, national debt must be increased. DI is more likely to occur when the economy capital income share and the preference for children are sufficiently low and the degree of patience is sufficiently high. However, differently from Diamond's case, DI turns out to be a necessary but not a su¢cient condition for welfare improvements to obtain via debt increases, since, in presence of endogenous fertility, the optimal level of debt is typically lower than the one associated to the traditional Golden Rule. Hence, not taking fertility choices into account would lead policymakers to overshoot the target, i.e. to issue too high a level of national debt. Finally, a sensitivity analysis shows that the optimal level of debt is higher the lower the capital share, the higher individuals' degree of patience, the bigger the child rearing cost and the lower the preference for children. On policy grounds we argue that for debt tightening policies to be optimal in the long run, it is necessary that the cost of rearing children does not increase (or, if anything, reduces).

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Bibliographic Info

Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2004/35.

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Date of creation: 01 Jan 2004
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Handle: RePEc:pie:dsedps:2004/35

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Related research

Keywords: Overlapping Generations; endogenous fertility; dynamic inefficiency; debt;

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Cited by:
  1. Fanti, Luciano & Gori, Luca, 2010. "Child policy solutions for the unemployment problem," Economics Letters, Elsevier, vol. 109(3), pages 147-149, December.
  2. Luciano Fanti & Luca Gori, 2009. "Longevity, fertility and PAYG pension systems sustainability," Discussion Papers 2009/77, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  3. Lorenzo Corsini & Elisabetta Olivieri, 2008. "Technological Change and the Wage Differential between Skilled and Unskilled Workers: Evidence from Italy," Discussion Papers 2008/73, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  4. Manuela Gussoni - Andrea Mangani, 2009. "The impact of public funding for innovation on firms' R&D investments: Do R&D cooperation and appropriability matter?," Discussion Papers 2009/90, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  5. Luca Gori, 2009. "Endogenous fertility, family policy and multiple equilibria," Discussion Papers 2009/79, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  6. Luciano Fanti & Luca Gori, 2009. "On economic growth and minimum wages," Discussion Papers 2009/78, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  7. Luciano Fanti & Luca Gori, 2009. "Endogenous lifetime in an overlapping generations small open economy," Discussion Papers 2009/92, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  8. Luciano Fanti & Luca Gori, 2009. "Endogenous fertility, endogenous lifetime and economic growth: the role of health and child policies," Discussion Papers 2009/91, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  9. Luciano Fanti & Luca Gori, 2008. "PAYG pensions and economic cycles: exogenous versus endogenous fertility," Discussion Papers 2008/75, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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