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Love Thy Children: Reflections on the Barro Debt Neutrality Theorem

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  • Philippe Weil
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    This paper proves that Barro's (1974) debt neutrality proposition, whose relevance hinges, in an economy with bequest motives, on bequests being operative in the economy without public debt, is not applicable to a wide class of overlapping generation economies — those with a ‘weak’ bequest motive. In particular, it is shown that the bequest motive is always too weak, and public debt therefore non-neutral, when non-physical assets have a well-defined function (reducing oversavings) in the corresponding economy without bequest motive, i.e., when the non-altruistic economy is dynamically inefficient.

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    File URL: http://spire.sciencespo.fr/hdl:/2441/8711/resources/love-thy-children.pdf
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    Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/8711.

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    Date of creation: May 1987
    Publication status: Published in ICFAI Journal of Monetary Economics, 1987, vol. 19, pp.377-391
    Handle: RePEc:spo:wpmain:info:hdl:2441/8711
    Contact details of provider: Web page: http://www.sciencespo.fr/

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
    3. Carmichael, Jeffrey, 1982. "On Barro's Theorem of Debt Neutrality: The Irrelevance of Net Wealth," American Economic Review, American Economic Association, vol. 72(1), pages 202-213, March.
    4. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-516, June.
    5. Gary S. Becker & Robert J. Barro, 1988. "A Reformulation of the Economic Theory of Fertility," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 1-25.
    6. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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