Finite Lifetimes and the Crowding Out Effects of Budget Deficits
This note explores the sensitivity of the short-run savings effects of government deficits to assumptions about household planning horizons. Using a lifecycle simulation model, we show that even though deficit policies shift sizable tax burdens to future generations, individuals live long enough to make the assumption of an infinite horizon a good approximation for analyzing the short-run savings effects. In practice, periods of debt accumulation such as that in the United States during World War II are reversed sufficiently rapidly to make their short-run effects on consumption and national savings relatively small.
|Date of creation:||Jun 1986|
|Date of revision:|
|Publication status:||published as Poterba, James M. and Lawrence H. Summers. "Finite Lifetimes and the Effectof Budget Deficits on National Saving," Journal of Monetary Economics, Vol . 20, September 1987, pp 369-392.|
|Note:||EFG ME PE|
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