Finite Lifetimes and the Crowding Out Effects of Budget Deficits

18 Pages Posted: 21 May 2000 Last revised: 14 Sep 2001

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: June 1986

Abstract

This note explores the sensitivity of the short-run savings effects ofgovernment deficits to assumptions about household planning horizons. Using alifecycle simulation model, we show that even though deficit policies shiftsizable tax burdens to future generations, individuals live long enough to makethe assumption of an infinite horizon a good approximation for analyzing theshort-run savings effects. In practice, periods of debt accumulation such asthat in the United States during World War II are reversed sufficiently rapidlyto make their short-run effects on consumption and national savings relativelysmall.

Suggested Citation

Poterba, James M. and Summers, Lawrence H., Finite Lifetimes and the Crowding Out Effects of Budget Deficits (June 1986). NBER Working Paper No. w1955. Available at SSRN: https://ssrn.com/abstract=228976

James M. Poterba (Contact Author)

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Lawrence H. Summers

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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