Pensions, Debt and Inflation Risk in a Monetary Union

Tinbergen Institute Discussion Paper 10-109/2

43 Pages Posted: 2 Nov 2010  

Yvonne Adema

CPB Netherlands Bureau of Economic Policy Analysis

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2010

Abstract

This paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the other country has funded pensions. The paper shows that the PAYG country can shift part of its long-term debt burden to the funded country. Moreover, the PAYG country gains from unexpected inflation at the cost of the funded country. In response to these conflicting interests about inflation, inflation risk may rise with the level of debt in the PAYG country. Higher inflation risk harms both countries. Actually, in contrast to the debt burden, the PAYG country cannot share the negative effects of a rise in inflation risk with the funded country. The scenarios analysed might be especially relevant for the years to come.

Keywords: spillovers, pensions, debt, inflation

JEL Classification: E31, F41, G11, G12, H55, H63

Suggested Citation

Adema, Yvonne, Pensions, Debt and Inflation Risk in a Monetary Union (October 29, 2010). Tinbergen Institute Discussion Paper 10-109/2. Available at SSRN: https://ssrn.com/abstract=1701041 or http://dx.doi.org/10.2139/ssrn.1701041

Yvonne Adema (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

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