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Debt, Deficits and Finite Horizons: The Stochastic Case

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  • Roger Farmer
  • Carine Nourry
  • Alain Venditti

Abstract

We introduce a solution technique for the study of discrete time stochastic models populated by long-lived agents. We introduce aggregate uncertainty and complete markets into a 'perpetual-youth' model of a kind first studied by Olivier Blanchard and we show that the pure-trade version of the model behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.

Suggested Citation

  • Roger Farmer & Carine Nourry & Alain Venditti, 2009. "Debt, Deficits and Finite Horizons: The Stochastic Case," NBER Working Papers 15025, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15025
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Ganelli, Giovanni, 2005. "The new open economy macroeconomics of government debt," Journal of International Economics, Elsevier, vol. 65(1), pages 167-184, January.
    3. Ganelli, Giovanni, 2003. "Useful government spending, direct crowding-out and fiscal policy interdependence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 87-103, February.
    4. Mr. Dirk V Muir & Mr. Douglas Laxton & Mr. Dennis P Botman & Mr. Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 2006/045, International Monetary Fund.
    5. Ghironi, Fabio, 2006. "Macroeconomic interdependence under incomplete markets," Journal of International Economics, Elsevier, vol. 70(2), pages 428-450, December.
    6. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
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    Cited by:

    1. Marco Airaudo & Salvatore Nisticò & Luis‐Felipe Zanna, 2015. "Learning, Monetary Policy, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(7), pages 1273-1307, October.
    2. Hippolyte d'Albis & Emmanuelle Augeraud-Véron, 2013. "Frequency of trade and the determinacy of equilibrium in economies of overlapping generations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 85-100, March.
    3. Jean-Philippe Bouchaud & Roger E. A. Farmer, 2023. "Self-Fulfilling Prophecies, Quasi Nonergodicity, and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 131(4), pages 947-993.
    4. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
    5. Richter, Alexander W., 2015. "Finite lifetimes, long-term debt and the fiscal limit," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 180-203.
    6. Farmer, Roger, 2016. "Pricing Assets in an Economy with Two Types of People," CEPR Discussion Papers 11253, C.E.P.R. Discussion Papers.
    7. Farmer, Roger E.A. & Platonov, Konstantin, 2019. "Animal spirits in a monetary model," European Economic Review, Elsevier, vol. 115(C), pages 60-77.
    8. Roger E. A. Farmer, 2018. "Pricing Assets in a Perpetual Youth Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 106-124, October.
    9. Farmer, Roger, 2015. "Global Sunspots and Asset Prices in a Monetary Economy," CEPR Discussion Papers 10402, C.E.P.R. Discussion Papers.
    10. Roger Farmer & Jean-Philippe Bouchaud, 2020. "Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality," NBER Working Papers 28261, National Bureau of Economic Research, Inc.
    11. Farmer, Roger & Farmer, Leland, 2022. "Zoomers and Boomers: Asset Prices and Intergenerational Inequality," CEPR Discussion Papers 17594, C.E.P.R. Discussion Papers.

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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E0 - Macroeconomics and Monetary Economics - - General
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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