The Optimum Structure for Government Debt
This paper studies the structural differences between implicit and explicit government debt in a two-generations-overlapping model with stochastic factor-prices. If a government can issue safe bonds and new claims to wage-indexed social security to service a given initial obligation, there exists a set of Pareto-efficient ways to do so. This set is characterized by the conflicting interests of the current young and the yet unborn generations regarding the allocation of factor-price risks. However, it is shown that there will always exist a simple intertemporal compensation mechanism which allows to reconcile these conflicting interests. This compensation mechanism narrows the set of Pareto-efficient debt structures until only one remains. This result hinges on the double-incomplete markets structure of stochastic OLG models where households can neither trade consumption loans nor factor-price risks privately.
|Date of creation:||21 Oct 2010|
|Contact details of provider:|| Postal: Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy, Amalienstraße 33, 80799 München, Germany|
Web page: http://www.mea.mpisoc.mpg.de/
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:mea:meawpa:09194. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Henning Frankenberger)
If references are entirely missing, you can add them using this form.