Golden rule and the role of government in a life-cycle growth model
Abstract
The author uses the life-cycle growth model to clarify the implications of government involvement in capital accumulation, arguing that a long-run trade-off between consumption possibilities is critical to long-run optimality. The long-run capital/labor ratio is shown to determine the amount that each member of a given generation will consume in each period of his lifetime. With the option of redistributing income between generations, the optimal path of a centrally planned economy is less-restrictive. This is not true in the case of government activities financed by debt, which suggests the government's desired role at present is to provide a mechanism for redistributing income between the younger and older generations.
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