Functional finance and intergenerational distribution in neoclassical and Keynesian OLG models

Abstract

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 fullemployment 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.’.