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Intergenerational risk sharing and fiscal policy

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  • Bohn, Henning

Abstract

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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  • Bohn, Henning, 2009. "Intergenerational risk sharing and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 805-816, September.
  • Handle: RePEc:eee:moneco:v:56:y:2009:i:6:p:805-816
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    More about this item

    Keywords

    Aggregate risks Optimal risk sharing Intergenerational transfers Overlapping generations Social security Fiscal policy;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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