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Debt Policy in a Competitive Two-Sector Overlapping Generations Model

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Author Info
Partha Sen (Delhi School of Economics)

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Abstract

We analyse debt policy in a two-period, two-sector overlapping generations model with Leontief technologies. We find that debt, issued to transfer resources to the initially old, could be welfare improving in the new steady state for an economy which satisfies the usual conditions for dynamic efficiency viz. the rate of interest is at least as great as the population growth rate. Out of steady state, the only potential losers are the recipients of the transfer. This could happen if the interest rate were to fall sufficiently to offset the effect of the transfer. From generation one onwards everyone becomes better off (under reasonable asumptions). Contrast this with a one-sector model where the definite gainers are those who are alive on date one.

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Publisher Info
Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 137.

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Length: 18 pages
Date of creation: Jul 2005
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Handle: RePEc:cde:cdewps:137

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Related research
Keywords: Government Debt; Overlapping Generations; Two-Sector Models; Dynamic Efficiency.;

Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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References listed on IDEAS
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  1. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, vol. 60(6), pages 1351-86, November. [Downloadable!] (restricted)
  2. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-97, August. [Downloadable!] (restricted)
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  3. Ihori, Toshihiro, 1978. "The Golden Rule and the Role of Government in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 68(3), pages 389-96, June. [Downloadable!] (restricted)
  4. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct. [Downloadable!] (restricted)
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