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The Burden of Unanticipated Fiscal Policy

Listed author(s):
  • Scharrer, Christian
  • Heer, Burkhard

We study the impact of a government spending shock on the distribution of wealth and income between cohorts in a dynamic stochastic overlapping generations model with two types of households, a Ricardian household and a rule-of-thumb consumer. We demonstrate that an unexpected increase in government spending increases income inequality and decreases wealth inequality. In contrast to conventional wisdom that the financing of the additional expenditures by debt rather than taxes especially burdens young on behalf of the old generations, we find that a bond-financed increase in government spending rather harms the Ricardian households during both working age and retirement, while the rule-of-thumb consumers benefit at working age. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.

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File URL: https://www.econstor.eu/bitstream/10419/145542/1/VfS_2016_pid_6370.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2016 (Augsburg): Demographic Change with number 145542.

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Date of creation: 2016
Handle: RePEc:zbw:vfsc16:145542
Contact details of provider: Web page: http://www.socialpolitik.org/
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