Simulating the Blanchard Conjecture in a Multiperiod Life Cycle Model
AEA Papers and Proceedings
vol. 110,
May 2020
(pp. 149-51)
Abstract
In recent writings, Olivier Blanchard has suggested that when the safe rate on government debt is less that the economy's growth rate, additional deficit-financed US federal spending would come at no cost to any future generation and benefits to some. This paper studies this question in a ten-period OLG CGE model with aggregate risk, whose safe rate averages -2 percent annually and growth rate is 0. It shows that welfare losses to future generations resulting from the introduction of pay-go social security, financed with a 15 percent payroll tax, are roughly 20 percent measured as a compensating variation relative to no policy.Citation
Hasanhodzic, Jasmina. 2020. "Simulating the Blanchard Conjecture in a Multiperiod Life Cycle Model." AEA Papers and Proceedings, 110: 149-51. DOI: 10.1257/pandp.20201105Additional Materials
JEL Classification
- D58 Computable and Other Applied General Equilibrium Models
- E23 Macroeconomics: Production
- E43 Interest Rates: Determination, Term Structure, and Effects
- H55 Social Security and Public Pensions
- H63 National Debt; Debt Management; Sovereign Debt