Welfare Implications of Debt and Transfers in a Low Safe Rate Environment

Abstract

This paper discusses the welfare implications of inter-generational transfers and debt rollovers in a stochastic overlapping-generations (OLG) economy where the growth rate is higher than the safe rate but lower than the average marginal product of capital. In such an economy, a social planner could generate a Pareto welfare improvement by introducing a policy consisting of a combination of a debt rollover and inter-generational transfers. One particular combination of debt rollover and wages subsidy would actually lead to an increase in the steady-state level of capital.