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Fiscal Deficits and Intergenerational Welfare in Almost Small Open Economies

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  • David F. Burgess

Abstract

The intergenerational welfare effects of government deficits are examined in a simple life-cycle economy which can borrow at given interest rates and import at given prices but has unexploited market power in exports. Despite perfect capital market integration, a deficit-financed tax cut to the current young causes an immediate real exchange rate of return on domestic assets. Subsequently, the real exchange rate depreciates to a lower steady-state value, and the after-tax wage decreases by more than the tax increase needed to service the larger deficit.

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  • David F. Burgess, 1996. "Fiscal Deficits and Intergenerational Welfare in Almost Small Open Economies," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 885-909, November.
    • Handle: RePEc:cje:issued:v:29:y:1996:i:4:p:885-909
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    Cited by:

    1. David Burgess, 2006. "Public Investment Criteria in Overlapping Generations Models of Open Economies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(1), pages 59-78, January.

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