Finite Lifetimes, Long-term Debt and the Fiscal Limit
34 Pages Posted: 20 Feb 2013 Last revised: 28 Jun 2015
Date Written: October 18, 2014
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: Suggested Citation