Deficit spending

I show that the current U.S. situation in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes may well be feasible. Put bluntly, public debt may have no fiscal cost.

A steady-state equilibrium in which the interest rate is less than the growth rate is said to be dynamically inefficient. In the representative agent model, dynamically inefficient equilbria cannot exist because they imply that the wealth of the representative agent is unbounded. But in the OLG model, dynamically inefficient equilibria are common and, in many examples of OLG models, dynamic inefficiency is associated with indeterminacy. In our 62-generation model (cohort enters the labor force at age 18, retires at age 66, and lives to age 79) however, there exist indeterminate equilibria that are dynamically efficient.