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The Fiscal Limit and Non-Ricardian Consumers

  • Alexander W. Richter

The U.S. faces exponentially rising entitlement obligations. I introduce a fiscal limit - a point where higher taxes are no longer a feasible financing mechanism - into a Perpetual Youth model to assess how intergenerational redistributions of wealth and the maturity of government debt impact the consequences of explosive government transfers. Intergenerational transfers of wealth strengthen the expectational effects of the fiscal limit and magnify the likelihood of stagflation. A longer average maturity of debt weakens these effects in the short/medium-runs but still increases stagflation in the long-run. Delaying reform increases the severity and duration of the stagflationary period.

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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2013-19.

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Date of creation: Nov 2013
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Handle: RePEc:abn:wpaper:auwp2013-19
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