The Burden of Unanticipated Government Spending

46 Pages Posted: 20 May 2016

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Christian Scharrer

University of Augsburg

Date Written: May 02, 2016

Abstract

We study the impact of a government spending shock on the distribution of income and wealth between cohorts in a dynamic stochastic Overlapping Generations model with two types of households, Ricardian households and rule-of-thumb consumers. We demonstrate that an unexpected increase in government spending increases income inequality and decreases wealth inequality. In contrast to the conventional wisdom that the financing of additional expenditures by debt rather than taxes especially burdens young generations, we find that a debt-financed increase in government spending also harms Ricardian households during retirement, while workers close to retirement benefit. The crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt.

Keywords: fiscal policy, debt financing, income and wealth distribution, rule-of-thumb consumers, Ricardian households, overlapping generations

JEL Classification: E620, E300, E120, E240, D310

Suggested Citation

Heer, Burkhard and Scharrer, Christian, The Burden of Unanticipated Government Spending (May 02, 2016). CESifo Working Paper Series No. 5876, Available at SSRN: https://ssrn.com/abstract=2781427 or http://dx.doi.org/10.2139/ssrn.2781427

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Christian Scharrer

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
77
Abstract Views
862
Rank
563,377
PlumX Metrics