Abstract
The intergenerational welfare effects of government deficits are examined in a simple life-cycle economy which can borrow at given interest rates and import at given prices but has unexploited market power in exports. Despite perfect capital market integration, a deficit-financed tax cut to the current young causes an immediate real exchange rate of return on domestic assets. Subsequently, the real exchange rate depreciates to a lower steady-state value, and the after-tax wage decreases by more than the tax increase needed to service the larger deficit.
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