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The household fallacy
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Farmer, Roger E. A. and Zabczyk, Pawel (2018) The household fallacy. Economics Letters, 169 . pp. 83-86. doi:10.1016/j.econlet.2018.05.018 ISSN 0165-1765.
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Official URL: https://doi.org/10.1016/j.econlet.2018.05.018
Abstract
We refer to the idea that government must ‘tighten its belt’ as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HJ Public Finance | ||||||||
Divisions: | Faculty of Social Sciences > Economics | ||||||||
Library of Congress Subject Headings (LCSH): | Debts, Public -- Mathematical models, Full employment policies, Government spending policy | ||||||||
Journal or Publication Title: | Economics Letters | ||||||||
Publisher: | Elsevier | ||||||||
ISSN: | 0165-1765 | ||||||||
Official Date: | August 2018 | ||||||||
Dates: |
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Volume: | 169 | ||||||||
Page Range: | pp. 83-86 | ||||||||
DOI: | 10.1016/j.econlet.2018.05.018 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 21 May 2018 | ||||||||
Date of first compliant Open Access: | 1 December 2019 | ||||||||
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