Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/330702 
Year of Publication: 
2025
Citation: 
[Journal:] KDI Journal of Economic Policy [ISSN:] 2586-4130 [Volume:] 47 [Issue:] 3 [Year:] 2025 [Pages:] 31-68
Publisher: 
Korea Development Institute (KDI), Sejong
Abstract: 
This study examines the long-term effects of higher national debt in South Korea on asset distribution. Using an overlapping generations general equilibrium model, we focus on two key channels: rising interest rates and falling wage rates, both driven by the crowding-out effect of capital. Higher interest rates increase asset dispersion, benefiting older groups with more accumulated assets, while younger groups with fewer assets gain less. Falling wage rates reduce the capacity to save money across all age groups, partially offsetting the dispersion effects of higher interest rates. A simulation of a 50% increase in national debt reveals a decline in the Gini coefficient of asset holdings, driven by the diminishing marginal increase in future assets relative to current holdings. However, widening cross-sectional dispersion proved more welfare-relevant: older age groups, which experienced greater gains in average assets, saw increases in average welfare, whereas early life-cycle cohorts with low asset levels experienced welfare losses. Given this trade-off associated with higher national debt, initial asset transfers as a counteracting measure can enhance lifetime welfare overall, mitigate the rising asset dispersion, and improve the asset Gini coefficient.
Subjects: 
National Debt
Government Debt
Asset Inequality
Asset Distribution
General Equilibrium
OLG
JEL: 
E10
E20
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article

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