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

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  • Dean D. Croushore

Abstract

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.

Suggested Citation

  • Dean D. Croushore, 1987. "The Neutrality of Optimal Government Financial Policy: Supplying the Intergenerational Free Lunch," Eastern Economic Journal, Eastern Economic Association, vol. 13(2), pages 123-136, Apr-Jun.
  • Handle: RePEc:eej:eeconj:v:13:y:1987:i:2:p:123-136
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume13/V13N2P123_136.pdf
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. 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 222-227, March.
    3. 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 467-467.
    4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    5. Freeman, Scott, 1985. "Transactions Costs and the Optimal Quantity of Money," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 146-157, February.
    6. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    7. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-577, June.
    8. 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 205-210, March.
    9. 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.
    10. 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 505-516, June.
    11. 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 405-414, June.
    12. 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 152-160, March.
    13. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-381, April.
    14. McCallum, Bennett T., 1983. "The role of overlapping-generations models in monetary economics," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 18(1), pages 9-44, January.
    15. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-880, December.
    16. David Cass & Menahem E. Yaari, 1966. "A Re-examination of the Pure Consumption Loans Model," Journal of Political Economy, University of Chicago Press, vol. 74, pages 353-353.
    17. 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 331-336, April.
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    Cited by:

    1. Fred Wallace, 1989. "The Neutrality of Optimal Government Financial Policy: Supplying the Intergenerational Free Lunch: A Comment," Eastern Economic Journal, Eastern Economic Association, vol. 15(2), pages 147-150, Apr-Jun.
    2. Dean D. Croushore, 1989. "What Neutrality Means in Macroeconomics: Reply," Eastern Economic Journal, Eastern Economic Association, vol. 15(2), pages 150-152, Apr-Jun.

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