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Intergenerational risk sharing and fiscal policy

  • Bohn, Henning

Risk-sharing implications of alternative fiscal policies are compared in a stochastic production economy with overlapping generations. Ex ante efficiency is shown to be achievable with optimal transfers, regardless of distributional concerns. For CRRA preferences, stylized real-world policies (notably safe debt and safe pensions) are found inefficient in the direction of imposing not enough productivity risk on retirees and too much on future generations. Safe transfers can be rationalized as efficient if preferences display age-increasing risk aversion, such as habit formation. The ubiquity of safe transfers suggests that governments treat the young as more risk tolerant than older cohorts.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 6 (September)
Pages: 805-816

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Handle: RePEc:eee:moneco:v:56:y:2009:i:6:p:805-816
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