Technical Report Intergenerational Politics, Government Debt, and Economic Growth

Ono, Tetsuo

14-23-Rev.2pp.1 - 37 , 2015-06 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
* Revised: [14-23-Rev., 2015]
* Revised:Intergenerational Politics, Government Debt and Economic Growth [14-23, 2014]
This study presents a two-period overlapping-generations model featuring intergenerational conflict over fiscal policy. In particular, we characterize a Markov-perfect political equilibrium of the voting game between generations and show the following three main results. First, population aging incentivizes the government to invest more in capital for future public spending, positively affecting economic growth. Second, when the government finances its spending by issuing bonds, the introduction of the balanced budget rule results in a higher public spending-to-GDP ratio and a higher growth rate. Third, to obtain a normative implication of the political equilibrium, we compare it with an allocation chosen by a benevolent planner who takes care of all future generations. The planners allocation might feature less growth and more borrowing than the political equilibrium if the planner attaches low weights to future generations.

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