IDEAS home Printed from https://ideas.repec.org/a/eee/moneco/v48y2001i1p81-108.html
   My bibliography  Save this article

The effectiveness of government debt and transfers as insurance

Author

Listed:
  • Floden, Martin

Abstract

Government debt and redistributive taxation can help people to smooth consumption when facing uninsurable individual specific risk. I examine the effects that variations in public debt and transfers have on risk sharing, efficiency, and the distribution of resources. I find that risk sharing can be improved significantly by both debt and transfers, but that debt has adverse effects on equity. When used in isolation, debt will enhance welfare if transfers are lower than optimal. However, the beneficial effects of public debt vanish if transfers are used optimally.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Floden, Martin, 2001. "The effectiveness of government debt and transfers as insurance," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 81-108, August.
    • Handle: RePEc:eee:moneco:v:48:y:2001:i:1:p:81-108
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304-3932(01)00064-2
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Domeij, David & Heathcote, Jonathan, 2000. "Factor Taxation with Heterogeneous Agents," SSE/EFI Working Paper Series in Economics and Finance 372, Stockholm School of Economics.
    2. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-346, April.
    3. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October.
    4. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    5. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
    6. Atkeson Andrew & Lucas Jr. , Robert E., 1995. "Efficiency and Equality in a Simple Model of Efficient Unemployment Insurance," Journal of Economic Theory, Elsevier, vol. 66(1), pages 64-88, June.
    7. David Card, 1990. "Intertemporal Labor Supply: An Assessment," Working Papers 649, Princeton University, Department of Economics, Industrial Relations Section..
    8. Gilbert Ghez & Gary S. Becker, 1975. "A Theory of the Allocation of Time and Goods Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 1-45, National Bureau of Economic Research, Inc.
    9. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
    10. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    11. Javier Diaz-Gimenez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 21(Spr), pages 3-21.
    12. Rao Aiyagari, S. & Peled, Dan, 1995. "Social insurance and taxation under sequential majority voting and utilitarian regimes," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1511-1528, November.
    13. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    14. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 83-132, National Bureau of Economic Research, Inc.
    15. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 219-234.
    16. Laurence Ball & N. Gregory Mankiw, 1995. "What do budget deficits do?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 95-119.
    17. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 176-215, June.
    18. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    19. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-1085, December.
    20. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, March.
    21. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-1175, December.
    22. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    23. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    24. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
    25. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    26. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    27. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
    28. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Goods Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 46-82, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dieppe, Alistair & Mourinho Félix, Ricardo & Marchiori, Luca & Grech, Owen & Albani, Maria & Lalouette, Laure & Kulikov, Dmitry & Papadopoulou, Niki & Sideris, Dimitris & Irac, Delphine & Gordo Mora, , 2015. "Public debt, population ageing and medium-term growth," Occasional Paper Series 165, European Central Bank.
    2. Takahashi, Shuhei & Yamada, Ken, 2022. "Understanding international differences in the skill premium: The role of capital taxes and transfers," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    3. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2010. "Evidence on the Insurance Effect of Redistributive Taxation," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 965-973, November.
    4. Nakajima, Tomoyuki & Takahashi, Shuhei, 2017. "The optimum quantity of debt for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 17-26.
    5. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 501-525, April.
    6. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 1-20.
    7. Martin Floden & Jesper Lindé, 2001. "Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 406-437, July.
    8. Paul Hiebert & Javier J. Pérez & Massimo Rostagno, 2002. "Debt reduction and automatic stabilisation," Economic Working Papers at Centro de Estudios Andaluces E2002/12, Centro de Estudios Andaluces.
    9. Röhrs, Sigrid & Winter, Christoph, 2015. "Public versus private provision of liquidity: Is there a trade-off?," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 314-339.
    10. Miguel Viegas & Ana Paula Ribeiro, 2011. "Welfare-improving Government Behaviour and Inequality - Inspection Using a Heterogeneous-agent Model," CEF.UP Working Papers 1103, Universidade do Porto, Faculdade de Economia do Porto.
    11. Leandro Gonçalves do Nascimento, 2004. "Investment in Human Capital in a Macrodynamic Framework: Redistributive Taxation, Public Debt and Welfare," Econometric Society 2004 North American Summer Meetings 539, Econometric Society.
    12. Shuhei Takahashi, 2020. "Time-Varying Wage Risk, Incomplete Markets, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 195-213, July.
    13. Michaelides, Alexander & Grant, Charles & Padula, Mario & Koulovatianos, Christos, 2008. "Evidence on the Insurance Effect of Marginal Income Taxes," CEPR Discussion Papers 6710, C.E.P.R. Discussion Papers.
    14. Viegas, Miguel & Ribeiro, Ana Paula, 2016. "Assessing Welfare Impacts Of Some Debt-Consolidation Episodes In The European Union," Macroeconomic Dynamics, Cambridge University Press, vol. 20(5), pages 1146-1173, July.
    15. Maarten Janssen & Sandro Shelegia, 2012. "Consumer Search and Vertical Relations: The Triple Marginalization Problem," Vienna Economics Papers 1206, University of Vienna, Department of Economics.
    16. Jonathan Heathcote & Kjetil Storesletten, 2005. "Insurance and Opportunities: The Welfare Implications of Rising Wage Dispersion," 2005 Meeting Papers 107, Society for Economic Dynamics.
    17. Oh, Hyunseung & Reis, Ricardo, 2012. "Targeted transfers and the fiscal response to the great recession," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 50-64.
    18. Lopez-Daneri, Martin, 2016. "NIT picking: The macroeconomic effects of a Negative Income Tax," Journal of Economic Dynamics and Control, Elsevier, vol. 68(C), pages 1-16.
    19. Hiebert, Paul & Pérez, Javier J. & Rostagno, Massimo, 2009. "The trade-off between public debt reduction and automatic stabilisation," Economic Modelling, Elsevier, vol. 26(2), pages 464-472, March.
    20. Clemens, Christiane & Heinemann, Maik, 2015. "Endogenous growth and wealth inequality under incomplete markets and idiosyncratic risk," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 300-317.
    21. Gaillard, Alexandre & Kankanamge, Sumudu, 2018. "Entrepreneurship, Labor Market Mobility and the Role of Entrepreneurial Insurance," TSE Working Papers 18-929, Toulouse School of Economics (TSE), revised Jan 2019.
    22. David Domeij & Paul Klein, 2002. "Private Pensions: To What Extent Do They Account for Swedish Wealth Inequality?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 503-534, July.
    23. repec:ecb:ecbops:2014165 is not listed on IDEAS
    24. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2010. "Evidence on the Insurance Effect of Redistributive Taxation," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 965-973, November.
    25. Willem L. Heeringa & Job Swank, 2019. "Heterogeneous Consumers, Credit Rationing, and Tax-Benefit Policies," De Economist, Springer, vol. 167(2), pages 105-126, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    2. Julio Dávila & Jay H. Hong & Per Krusell & José‐Víctor Ríos‐Rull, 2012. "Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks," Econometrica, Econometric Society, vol. 80(6), pages 2431-2467, November.
    3. Martin Floden & Jesper Lindé, 2001. "Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 406-437, July.
    4. Hsu, Minchung & Yang, C.C., 2013. "Optimal linear and two-bracket income taxes with idiosyncratic earnings risk," Journal of Public Economics, Elsevier, vol. 105(C), pages 58-71.
    5. Jonathan Heathcote, 2005. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 161-188.
    6. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
    7. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
    8. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
    9. Domeij, David & Heathcote, Jonathan, 2000. "Factor Taxation with Heterogeneous Agents," SSE/EFI Working Paper Series in Economics and Finance 372, Stockholm School of Economics.
    10. Jose Mustre-del-Rio, 2011. "The aggregate implications of individual labor supply heterogeneity," Research Working Paper RWP 11-09, Federal Reserve Bank of Kansas City.
    11. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, February.
    12. Jonathan Heathcote, 2003. "On the Distributional Effects of Reducing Capital Taxes (previously: Factor Taxation with Heterogeneous Agents)," Working Papers gueconwpa~03-03-22, Georgetown University, Department of Economics.
    13. repec:ner:carlos:info:hdl:10016/258 is not listed on IDEAS
    14. Manuel Toledo, 2006. "On the Intergenerational Persistence of Work Hours," 2006 Meeting Papers 226, Society for Economic Dynamics.
    15. David Domeij & Jonathan Heathcote, 2000. "Capital Versus Labor Taxation with Heterogeneous Agents," Econometric Society World Congress 2000 Contributed Papers 0834, Econometric Society.
    16. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    17. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
    18. Conesa, Juan Carlos & Krueger, Dirk, 2006. "On the optimal progressivity of the income tax code," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1425-1450, October.
    19. Luigi Pistaferri, 2003. "Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 729-754, July.
    20. Aleksandar Vasilev, 2013. "On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework," Working Papers 2013_20, Business School - Economics, University of Glasgow.
    21. Feigenbaum James A. & Li Geng, 2012. "Life Cycle Dynamics of Income Uncertainty and Consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-49, May.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:48:y:2001:i:1:p:81-108. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505566 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.