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The Neutrality of Optimal Government Financial Policy: Supplying the Intergenerational Free Lunch

  • Dean D. Croushore

This paper demonstrates the usefulness and simplicity of the overlapping-generations model for analyzing certain types of macroeconomic problems. An overlapping-generations model is used to clarify and interpret some existing neutrality theorems concerning government debt and monetization. The results demonstrate the stringency of the conditions needed for neutrality, suggesting that money and government debt are very unlikely to be neutral.

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume13/V13N2P123_136.pdf
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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 13 (1987)
Issue (Month): 2 (Apr-Jun)
Pages: 123-136

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Handle: RePEc:eej:eeconj:v:13:y:1987:i:2:p:123-136
Contact details of provider: Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
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  1. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, vol. 69(1), pages 152-60, March.
  2. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-81, April.
  3. David Cass & Menahem E. Yaari, 1965. "A Re-Examination of the Pure Consumption Loans Model," Cowles Foundation Discussion Papers 195, Cowles Foundation for Research in Economics, Yale University.
  4. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
  5. Bierwag, G O & Grove, M A & Khang, Chulsoon, 1969. "National Debt in a Neoclassical Growth Model: Comment," American Economic Review, American Economic Association, vol. 59(1), pages 205-10, March.
  6. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June.
  7. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-16, June.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  9. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
  10. Bennett T. McCallum, 1982. "The Role of Overlapping-Generations Models in Monetary Economics," NBER Working Papers 0989, National Bureau of Economic Research, Inc.
  11. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  12. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  13. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-36, April.
  14. Webb, David C, 1981. "The Net Wealth Effect of Government Bonds When Credit Markets are Imperfect," Economic Journal, Royal Economic Society, vol. 91(362), pages 405-14, June.
  15. Freeman, Scott, 1985. "Transactions Costs and the Optimal Quantity of Money," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 146-57, February.
  16. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December.
  17. Burbidge, John B, 1983. "Government Debt in an Overlapping-Generations Model with Bequests and Gifts," American Economic Review, American Economic Association, vol. 73(1), pages 222-27, March.
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