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Functional finance and intergenerational distribution in neoclassical and Keynesian OLG models*

Peter Skott and Soon Ryoo

Keywords: public debt; Keynesian OLG model; secular stagnation; structural liquidity trap; dynamic efficiency; confidence

This paper examines the role of fiscal policy in a Keynesian OLG model. We show that (i) dynamic inefficiency in a neoclassical OLG model generates aggregate demand problems in a Keynesian version of the model, (ii) fiscal policy can be used to achieve full-employment growth, (iii) the required debt ratio is inversely related to both the growth rate and government consumption, and (iv) a simple and distributionally neutral tax scheme can maintain full employment in the face of variations in ‘household confidence.’

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