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The Welfare Effects of Debt: Crowding Out and Risk Shifting: Working Paper 2022-10

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  • Michael Falkenheim

Abstract

Government debt affects people’s welfare through two distinct channels: It crowds out capital, and it shifts risk from current to future generations. This study extends Olivier Blanchard’s 2019 analysis of the welfare effects of debt by decomposing his estimates into those two categories. Blanchard estimated the change in average utility under simulations of an overlapping generations model with and without a transfer of wealth from the younger to the older generation. This study decomposes those estimated welfare effects into crowding-out and risk- shifting components and

Suggested Citation

  • Michael Falkenheim, 2022. "The Welfare Effects of Debt: Crowding Out and Risk Shifting: Working Paper 2022-10," Working Papers 58849, Congressional Budget Office.
    • Handle: RePEc:cbo:wpaper:58849
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    File URL: https://www.cbo.gov/system/files/2022-12/58849-Welfare.pdf
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Richard W. Evans, 2020. "Public Debt, Interest Rates, and Negative Shocks," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 137-140, May.
    3. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
    4. Jasmina Hasanhodzic, 2020. "Simulating the Blanchard Conjecture in a Multiperiod Life Cycle Model," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 149-151, May.
    5. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    6. Bohn, Henning, 2009. "Intergenerational risk sharing and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 805-816, September.
    7. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 29-42.
    8. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    9. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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