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Finite lifetimes, long-term debt and the fiscal limit

Listed author(s):
  • Richter, Alexander W.

The U.S. faces exponentially rising entitlement obligations. I introduce a fiscal limit—a point where higher taxes are no longer a feasible financing mechanism—into a Perpetual Youth model to examine how intergenerational redistributions of wealth, the average duration of government debt, and entitlement reform impact the consequences of explosive government transfers. Three key findings emerge: (1) Growing government transfers cause more severe and more persistent stagflation than in representative agent models that do not capture intergenerational transfers of wealth; (2) A longer average duration of government debt pushes the financing of government liabilities into the future and reduces the short-run impacts of explosive transfers; (3) The time it takes the economy to rebound from a period of growing transfers increases exponentially with the number of years it takes to pass entitlement reform.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 51 (2015)
Issue (Month): C ()
Pages: 180-203

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Handle: RePEc:eee:dyncon:v:51:y:2015:i:c:p:180-203
DOI: 10.1016/j.jedc.2014.10.008
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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