Finite Lifetimes and the Crowding Out Effects of Budget Deficits
This note explores the sensitivity of the short-run savings effects of
government deficits to assumptions about household planning horizons. Using a
lifecycle simulation model, we show that even though deficit policies shift
sizable tax burdens to future generations, individuals live long enough to make
the assumption of an infinite horizon a good approximation for analyzing the
short-run savings effects. In practice, periods of debt accumulation such as
that in the United States during World War II are reversed sufficiently rapidly
to make their short-run effects on consumption and national savings relatively
small.
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Copy CitationJames M. Poterba and Lawrence H. Summers, "Finite Lifetimes and the Crowding Out Effects of Budget Deficits," NBER Working Paper 1955 (1986), https://doi.org/10.3386/w1955.
Published Versions
Poterba, James M. and Lawrence H. Summers. "Finite Lifetimes and the Effectof Budget Deficits on National Saving," Journal of Monetary Economics, Vol . 20, September 1987, pp 369-392.