Public Debt Policy in an Endogenous Growth Model of Perpetual Youth

Abstract

This paper combines into a single consistent framework the Blanchard-Yaari model of perpetual youth and an endogenous growth model of human capital accumulation. In the steady-state equilibrium of the modelled closed economy, consumption, production, human capital and physical capital all grow at an uniform rate. This rate depends, apart from a vector of parameters, only on the amount of time that decentrally optimizing private households of heterogeneous age allocate to education and training. Contrary to the exogenous growth models of overlapping generations, there is no scope for public debt policy to Pareto-improve welfare in such a model. An increase in public debt reduces the steady-state growth rate of the economy and hence necessarily hurts future generations.