Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/141853
Authors: 
Heer, Burkhard
Scharrer, Christian
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 5876
Abstract: 
We study the impact of a government spending shock on the distribution of income and wealth between cohorts in a dynamic stochastic Overlapping Generations model with two types of households, Ricardian households and rule-of-thumb consumers. We demonstrate that an unexpected increase in government spending increases income inequality and decreases wealth inequality. In contrast to the conventional wisdom that the financing of additional expenditures by debt rather than taxes especially burdens young generations, we find that a debt-financed increase in government spending also harms Ricardian households during retirement, while workers close to retirement benefit. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.
Subjects: 
fiscal policy
debt financing
income and wealth distribution
rule-of-thumb consumers
Ricardian households
overlapping generations
JEL: 
E62
E30
E12
E24
D31
Document Type: 
Working Paper

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