Finite Lifetimes and the Crowding Out Effects of Budget Deficits

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.