Are generational accounts informative about the effect of the budget on the intergenerational distribution of resources (when augmented with generation-specific propensities to consume out of life-time resources) on aggregate consumption and saving? The paper makes three points. First, the usefulness of generational accounts lives of dies with the strict life-cycle model of household consumption. Voluntary intergenerational gifts or liquidity constraints may therefore adversely affect or even destroy their informativeness. Second, even when the life cycle model holds, generational accounts only measure the effect of the budget on the life-time consumption of private goods and services. They ignore the inter-generational (re-)distribution associated with the government's provision of public goods and services. Third, generational accounting ignores the effect of the budget on before-tax and before-transfer quantities and prices, including before-tax and -transfer distribution of life-time resources across generational and intertemporal relative prices. That is, it does not handle incidence or general equilibrium repercussions very well. Although useful generational accounts should therefore carry the label "handle with great care".
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|Date of creation:||Apr 1995|
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