Endogenous fertility, Ricardian equivalence, and debt management policy

Abstract

The paper develops a model in which dynastic families optimally determine fertility. Government debt represents a tax on future generations and on childbearing; the Ricardian Equivalence Hypothesis does not hold. Debt is welfare reducing in that it distorts the fertility decision. An increase in government debt induces a decline in fertility and an increase in the steady state capital/labor ratio. If a government inherits an existing stock of debt, the first-best policy is to eliminate the debt immediately. In other situations the optimal debt management policy will not, in general, entail a total elimination of the debt.