Governmental debt, interest policy, and tax stabilization in a stochastic OLG economy

Arbeitspapier

The paper analyzes the sustainability of governmental debt and its welfare properties in an overlapping generations economy with stochastic production and capital accumulation. In the absence of taxation, equilibria with positive debt generically converge to debtless eauilibria are typically inefficient. It is shown that this may be overcome by a tax on labor income which stabilizes the level of debt against unfavorable shocks. A long-run welfare criterion is formulated which measures consumer utility at the stabilized equlibrium. Based on this criterion, the welfare effects of different interest policies and alternative stabilization objectives are investigated. The results offer a simple explanation why empirical debt levels are high and typically yield a riskless return despite both fails to be optimal in the long run.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: KIT Working Paper Series in Economics ; No. 14

Classification and Topics

• Classification: Wirtschaft ; Existence and Stability Conditions of Equilibrium ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications ; Fiscal Policy ; Taxation and Subsidies: Efficiency; Optimal Taxation ; National Debt; Debt Management; Sovereign Debt
• Subject: OLG ; governmental debt ; interest policy ; risk sharing ; tax stabilization ; stabilized equilibrium ; long-run welfare ; Öffentliche Schulden ; Zinspolitik ; Lohnsteuer ; Steuerpolitik ; Overlapping Generations ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hillebrand, Marten
• Event: Veröffentlichung
• (who): Karlsruher Institut für Technologie (KIT), Institut für Volkswirtschaftslehre (ECON)
• (where): Karlsruhe
• (when): 2011

Further information

• DOI: doi:10.5445/IR/1000021842
• Handle: http://hdl.handle.net/10419/43892
• URN: urn:nbn:de:swb:90-218422
• Last update: 10.03.2025, 11:45 AM CET