Deviant generations, Ricardian equivalence, and growth cycles

Abstract

Two equilibrium possibilities are known to obtain in a standard overlapping-generations model with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. Dynamic equilibria, where the bequest motive is occasionally operative, cannot emerge. This paper studies bequest-giving behavior and out-of-steady-state bequest and growth dynamics in a Ak model with intra-and intergenerational consumption externalities. These externalities, by their very presence, do not destroy Ricardian equivalence. They may, however, give rise to deviant generations -generations that do not leave a bequest having received an inheritance, and vice versaand that seals the fate for Ricardian equivalence. Consumption externalities may also generate interesting indeterminacies and endogenous growth cycles that did not exist otherwise.

Endogenous fluctuations in an endogenous growth model: An analysis of inflation targeting as a policy

“…Although recent studies in an OLG model environment also provide evidence of fluctuations, and some point to chaotic behaviour of the equilibrium growth rate, most of the recent findings hinges critically on non-linearities from the technology or preference set (Grandmont (1985); Michel (1993); Cazzavillan (1996) and Matsuyama (1999)), the returns-to-scale characteristics of the production function (Boldrin and Rustichini (1994); Benhabib and Farmer (1996); Mitra and Nishimura (2001) and Mino (2001)) and the specific characteristics of the generations contained in the model, specifically the bequest motive (Constantinides, Donaldson and Mehra (2007) and Barnett, et al (2013)). Moreover, to the best of our knowledge, only Barnett, Bhattacharya and Bunzel (2010) as well as Gupta and Vermeulen (2010) specifically model the role of money in an OLG environment to analyse the existence of cycles.…”

“…This assumption provides analytical tractability in the same vein asBarnett, Bhattacharya and Bunzel (2013), and should be viewed against the generational structure of the OLG model, where a typical generation might span 20 or 30 years. Also seeCazzavillan (1996),Chen (2006) andDávila (2012).…”

Analyzing the Importance of the Determinants of Public Debt and Its Policy Implications: A Survey of Literature

“…Ricardian equivalence concludes that it does not matter how the government increases spending, whether through public debt issuance or expansionary fiscal policy, as demand will remain identical, obtaining the same result (Crespo Cuaresma and Reitschuler 2007; Ahiakpor 2013; Barnett, Bhattacharya and Bunzel 2013; Belingher and Moroianu 2015; Hayo and Neumeier 2017). Therefore, public debt will not achieve what it intends but will create a burden for future generations by having to bear higher taxes.…”

Bequests or education

“…It remains, nonetheless, that the subsequent literature kept focusing on the Ricardian equivalence (or debt neutrality) debate-e.g. see Weil, (1987), Barnett et al (2013)-instead of on the right mix of bequests and education.…”