Love Thy Children: Reflections on the Barro Debt Neutrality Theorem

Abstract

This paper proves that Barro's (1974) debt neutrality proposition, whose relevance hinges, in an economy with bequest motives, on bequests being operative in the economy without public debt, is not applicable to a wide class of overlapping generation economies — those with a ‘weak’ bequest motive. In particular, it is shown that the bequest motive is always too weak, and public debt therefore non-neutral, when non-physical assets have a well-defined function (reducing oversavings) in the corresponding economy without bequest motive, i.e., when the non-altruistic economy is dynamically inefficient.