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The Welfare Costs of Deficit Finance


  • Hansson, Ingemar
  • Stuart, Charles


The authors analyze the welfare consequences of deficit finance in a gene ral equilibrium model fit to the U.S. economy. Current spending may b e financed with current and/or future distortionary taxes. The econom y is open to international capital flows. The welfare costs of financ ing marginal current spending are substantial and are sensitive to th e timing of the required taxes; postponing a tax on labor income is a dvantageous, but postponing a tax on asset income is not. Ricardian e quivalence poorly approximates the economy considered. Copyright 1987 by Oxford University Press.

Suggested Citation

  • Hansson, Ingemar & Stuart, Charles, 1987. "The Welfare Costs of Deficit Finance," Economic Inquiry, Western Economic Association International, vol. 25(3), pages 479-496, July.
  • Handle: RePEc:oup:ecinqu:v:25:y:1987:i:3:p:479-96

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    References listed on IDEAS

    1. J. Michael Harrison & William F. Sharpe, 1983. "Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 91-106 National Bureau of Economic Research, Inc.
    2. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
    3. Jeremy I. Bulow & Myron S. Scholes, 1983. "Who Owns the Assets in a Defined-Benefit Pension Plan?," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 17-36 National Bureau of Economic Research, Inc.
    4. Pesando, James E, 1982. " Investment Risk, Bankruptcy Risk, and Pension Reform in Canada," Journal of Finance, American Finance Association, vol. 37(3), pages 741-749, June.
    5. Martin Feldstein & Randall Morck, 1983. "Pension Funding Decisions, Interest Rate Assumptions, and Share Prices," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 177-210 National Bureau of Economic Research, Inc.
    6. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, January.
    7. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    8. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    9. Jeremy I. Bulow, 1981. "Early Retirement Pension Benefits," NBER Working Papers 0654, National Bureau of Economic Research, Inc.
    10. Ippolito, Richard A, 1985. "The Economic Function of Underfunded Pension Plans," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 611-651, October.
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    Cited by:

    1. Riera Prunera, Maria Carmen, 2000. "A Role For Deficit In Economic Growth," ERSA conference papers ersa00p335, European Regional Science Association.
    2. Maria Carme Riera i Prunera, 2003. "Deficit, human capital and economic growth dynamics," Working Papers in Economics 102, Universitat de Barcelona. Espai de Recerca en Economia.

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