The Intertemporal Effects of International Transfers

The classical transfer problem is studied in an overlapping generations framework, where the transfer is from a creditor country to a debtor country. A distinction is made between tax-financed and debt-financed transfers on the one hand, and between the uses of the transfer on the other hand. The transfer can be used to increase private income or to reduce government debt. It is first shown that the transfer can make the welfare change in the same direction in both of the countries, and that this possibility cannot be ruled out by stability condition. It is also shown that for all transfers the short run and the long run welfare effects; may be qualitatively different. The only form of transfer that in the long run surely increases welfare in the country receiving the transfer is the tax-financed debt-relief. But in the short run it will reduce the welfare in all countries. There exists thus a trade-off between short and long run welfare, since all other forms of transfers guarantee a short run welfare improvement for the receiving country.