Interest in the effects of government budget deficits waned in the late 1990’s as deficits in many countries substantially declined. There is adequate empirical evidence that government debt has real effects, and an assortment of suspected causes, but little agreement on the significance of its failure. The recent resurgence of significant fiscal deficits in many countries should motivate additional work on this topic.

Previous research indicates a sizeable portion of wealth is accumulated out of a desire to leave intergenerational bequests; less clear is the exact motive for these bequests. The impact of government deficits likely depends strongly on the exact nature of intergenerational relationships, a fact highlighted in Cremer and Pestieau (2003) and Kaplow (2001). I employ a little-studied version of intergenerational relationships to show that the effects of some fiscal policies can be quite sensitive to the nature of these relationships while other policies are neutral. Specifically, deficit financing is neutral when taxes are lump sum but, when using capital gains and inheritance taxes, crowding out is significantly smaller in versions of the model with strategic behavior than in one without strategic behavior.