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The age-specific burdens of short-run fluctuations in government spending

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  • Heer, Burkhard
  • Scharrer, Christian

Abstract

We study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households, Ricardian households and rule-of-thumb consumers. We demonstrate that an unexpected increase in government spending decreases income and wealth inequality. In contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations, we find that debt-financing also harms Ricardian households during retirement. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.

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  • Heer, Burkhard & Scharrer, Christian, 2018. "The age-specific burdens of short-run fluctuations in government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 45-75.
    • Handle: RePEc:eee:dyncon:v:90:y:2018:i:c:p:45-75
    DOI: 10.1016/j.jedc.2018.01.041
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    Cited by:

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    2. Joseph Kopecky, 2021. "The Age for Austerity? Population Age Structure and Fiscal Multipliers," Trinity Economics Papers tep1621, Trinity College Dublin, Department of Economics.
    3. Burkhard Heer & Andreas Irmen & Bernd Süssmuth, 2023. "Explaining the decline in the US labor share: taxation and automation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1481-1528, December.
    4. Kopecky, Joseph, 2022. "The age for austerity? Population age structure and fiscal consolidation multipliers," Journal of Macroeconomics, Elsevier, vol. 73(C).
    5. Süssmuth, Bernd & Irmen, Andreas & Heer, Burkhard, 2020. "Taxation, Automation Capital, and the Functional Income Distribution," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224572, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Fiscal policy; Debt financing; Income and wealth distribution; Rule-of-thumb consumers; Ricardian households; Overlapping generations;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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