TY - JOUR AU - Evans, Richard W AU - Kotlikoff, Laurence J AU - Phillips, Kerk L TI - Game Over: Simulating Unsustainable Fiscal Policy JF - National Bureau of Economic Research Working Paper Series VL - No. 17917 PY - 2012 Y2 - March 2012 DO - 10.3386/w17917 UR - http://www.nber.org/papers/w17917 L1 - http://www.nber.org/papers/w17917.pdf N1 - Author contact info: Richard W. Evans Baker Institute for Public Policy Rice University 6100 Main Street, Baker Hall MS-40 Houston, TX 77005 Tel: 773-892-2948 E-Mail: rwevans@rice.edu Laurence J. Kotlikoff Department of Economics Boston University 270 Bay State Road Boston, MA 02215 Tel: 617/353-4002 Fax: 617/353-4001 E-Mail: kotlikoff@gmail.com Kerk Phillips Department of Economics Building 130 FOB Brigham Young University Provo, UT 84602 Tel: 801/378-5928 phone E-Mail: kerk.phillips@cbo.gov M1 - published as Richard W. Evans, Laurence J. Kotlikoff, Kerk L. Phillips. "Game Over: Simulating Unsustainable Fiscal Policy," in Alberto Alesina and Francesco Giavazzi, editors, "Fiscal Policy after the Financial Crisis" University of Chicago Press (2013) AB - Fiscal sustainability is one of the most pressing policy issues of our time. Yet it remains difficult to quantify. Official debt is plagued with a number of measurement difficulties since its measurement reflects the choice of words, not policies. And forming the fiscal gap-the imbalance in the government's intertemporal budget-requires strong discount rate assumptions. An alternative approach, taken here, is specifying a stochastic general equilibrium model and determining via simulation how long it takes for the economy to reach game over-the point where current policy can no longer be maintained. Our simulations, based on an OLG model calibrated to the U.S. economy, produce an average duration to game over of roughly one century, with a 35 percent chance of reaching the fiscal limit in roughly 30 years. The prospect of man-made economic collapse produces large equity premia, like those observed in the data. Our simulations show that both the fiscal gap and the equity premium rise as the economy gets closer to hitting its fiscal limit, suggesting that the fiscal gap and the equity premium may be good indicators of unsustainable policy. ER -