All Rights Reserved
AccessEcon LLC 2006, 2008.
Powered by MinhViet JSC
ralph lauren polo

Dirk Willenbockel
''Public debt, the terms of trade and welfare in an overlapping generations model with lifetime uncertainty''
( 2005, Vol. 5 No.10 )
This article reconsiders the relationship between government debt and welfare in a two-country overlapping-generations model with lifetime uncertainty and international product differentiation. It has recently been proposed that a higher steady-state debt level may be welfare-enhancing in this setting. It is pointed out that this proposition does not adequately account for the effect of debt policy on individual agents' intertemporal consumption profiles. While a higher debt may indeed raise aggregate steady-state consumption, the lifetime utility of all steady-state cohorts will actually , unless the elasticity of substitution between domestic output and imports is extremely low. These particular results illustrate a more general caveat pertaining to any normative policy analysis in settings with overlapping generations of intertemporally optimizing agents: Attempts to draw welfare inferences on the basis of comparisons of aggregate consumption paths can be misleading.
JEL: E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
H6 - National Budget, Deficit, and Debt: General
Manuscript Received : Sep 10 2005 Manuscript Accepted : Oct 25 2005

  This abstract has been downloaded 2040 times                The Full PDF of this paper has been downloaded 149391 times