Finite Lifetimes, Long-term Debt and the Fiscal Limit

34 Pages Posted: 20 Feb 2013 Last revised: 28 Jun 2015

Alexander W. Richter

Federal Reserve Bank of Dallas

Date Written: October 18, 2014

Abstract

The U.S. faces exponentially rising entitlement obligations. I introduce a fiscal limit -- a point where higher taxes are no longer a feasible financing mechanism -- into a Perpetual Youth model to examine how intergenerational redistributions of wealth, the average duration of government debt, and entitlement reform impact the consequences of explosive government transfers. Three key findings emerge: (1) Growing government transfers cause more severe and more persistent stagflation than in representative agent models that do not capture intergenerational transfers of wealth; (2) A longer average duration of government debt pushes the financing of government liabilities into the future and reduces the short-run impacts of explosive transfers; (3) The time it takes the economy to rebound from a period of growing transfers increases exponentially with the number of years it takes to pass entitlement reform.

Keywords: Finite lifetime, long-term debt, policy uncertainty, fiscal limit, entitlement reform

JEL Classification: E62, E63, H60, E43

Suggested Citation

Richter, Alexander W., Finite Lifetimes, Long-term Debt and the Fiscal Limit (October 18, 2014). Journal of Economic Dynamics and Control, Vol. 51, 2015. Available at SSRN: https://ssrn.com/abstract=2220237 or http://dx.doi.org/10.2139/ssrn.2220237

Alexander W. Richter (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

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