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.
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.