Munich Personal RePEc Archive

Paces of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach

Maebayashi, Noritaka (2021): Paces of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach.

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Abstract

This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level as well as the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) the global transition dynamics of the economy, (ii) a threshold (ceiling) of public debt to ensure fiscal sustainability, (iii) sustainable paces of these consolidations, and (iv) optimal pace of consolidations from viewpoints of both social welfare and fairness of each generation's welfare. We find that higher paces or lower targets of debt-to-GDP ratio make fiscal policies more sustainable. The pace required of tax-based consolidation to ensure fiscal sustainability is higher than that required of expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation. It depends on how large outstanding debts relative to capital are and how large the utility derived by individuals from public goods and services is. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that very slow pace of fiscal consolidation cannot be supported.

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