Centre For Labour Economics

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For an economic system not to exhibit debt neutrality it must be true that changes in the time profile of lump-sum taxes redistributes resources between heterogeneous consumers. OLD models have age heterogeneity because of a positive birth rate. Unless a bequest motive or child-to-parent gift motive is operative, a positive birth rate is sufficient for absence if debt neutrality. Uncertain lifetimes are neither necessary nor sufficient for absence of debt neutrality, with or without efficient life insurance markets. Heterogeneous survival probabilities are a sufficient condition. Heterogeneous time preference rates or elasticities of marginal utility does not destroy debt neutrality, since with common survival rates, changes in the pattern over time of lump-sum taxes do not redistribute resources. Any representative agent model, regardless of the scope and severity of capital market imperfections, will exhibit debt neutrality.

Published:

• "Debt Neutrality, Redistribution and Consumer Heterogeneity: A Survey and Some Extensions." From Principles of Budgetary and Financial Policy,edited by Willem H. Buiter, pp. 183-222. Hertfordshire, England: Harvester Wheatsheaf, 1990. ,
• "The Welfare Economics of Cooperative and Non-cooperative Fiscal Policy," Journal of Economic Dynamics and Control, 1991.

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