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The Household Fallacy

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  • Roger Farmer
  • Pawel Zabczyk

Abstract

We refer to the idea that government must 'tighten its belt' as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive.

Suggested Citation

  • Roger Farmer & Pawel Zabczyk, 2018. "The Household Fallacy," NBER Working Papers 24393, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24393
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    References listed on IDEAS

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    6. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
    7. Cass, David & Okuno, Masahiro & Zilcha, Itzhak, 1979. "The role of money in supporting the pareto optimality of competitive equilibrium in consumption-loan type models," Journal of Economic Theory, Elsevier, vol. 20(1), pages 41-80, February.
    8. Gourieroux, C & Laffont, J J & Monfort, Alain, 1982. "Rational Expectations in Dynamic Linear Models: Analysis of the Solutions," Econometrica, Econometric Society, vol. 50(2), pages 409-425, March.
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    Cited by:

    1. Alam, Md. Samsul & Miah, Mohammad Dulal & Hammoudeh, Shawkat & Tiwari, Aviral Kumar, 2018. "The nexus between access to electricity and labour productivity in developing countries," Energy Policy, Elsevier, vol. 122(C), pages 715-726.
    2. Leibowicz, Benjamin D. & Lanham, Christopher M. & Brozynski, Max T. & Vázquez-Canteli, José R. & Castejón, Nicolás Castillo & Nagy, Zoltan, 2018. "Optimal decarbonization pathways for urban residential building energy services," Applied Energy, Elsevier, vol. 230(C), pages 1311-1325.
    3. Srinivasan, Suchita & Carattini, Stefano, 2020. "Adding fuel to fire? Social spillovers in the adoption of LPG in India," Ecological Economics, Elsevier, vol. 167(C).

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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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