Public Debt, the Terms of Trade and Welfare in an Overlapping Generations Model with Lifetime Uncertainty

Economics Bulletin, Vol. 5, No. 10, pp. 1-8, 2005

9 Pages Posted: 24 Jan 2006

See all articles by Dirk Willenbockel

Dirk Willenbockel

University of Sussex - Institute of Development Studies

Abstract

This article reconsiders the relationship between government debt and welfare in a two-country overlapping-generations model with lifetime uncertainty and international product differentiation. It has recently been proposed that a higher steady-state debt level may be welfare-enhancing in this setting. It is pointed out that this proposition does not adequately account for the effect of debt policy on individual agents' intertemporal consumption profiles. While a higher debt may indeed raise aggregate steady-state consumption, the lifetime utility of all steady-state cohorts will actually drop, unless the elasticity of substitution between domestic output and imports is extremely low. These particular results illustrate a more general caveat pertaining to any normative policy analysis in settings with overlapping generations of intertemporally optimizing agents: Attempts to draw welfare inferences on the basis of comparisons of aggregate consumption paths can be misleading.

Keywords: Overlapping generations, lifetime uncertainty, perpetual youth model, debt, welfare, terms of trade, intertemporal choice

JEL Classification: H6, E6, D9, F41

Suggested Citation

Willenbockel, Dirk, Public Debt, the Terms of Trade and Welfare in an Overlapping Generations Model with Lifetime Uncertainty. Economics Bulletin, Vol. 5, No. 10, pp. 1-8, 2005, Available at SSRN: https://ssrn.com/abstract=877016

Dirk Willenbockel (Contact Author)

University of Sussex - Institute of Development Studies ( email )

Brighton
Falmer, Brighton, East Sussex BN1 9RE
United Kingdom

HOME PAGE: http://www.ids.ac.uk

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
73
Abstract Views
607
rank
353,501
PlumX Metrics