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  Dynamic Inefficiency and Fiscal Interventions in an Economy with Land and Transaction Costs

Hellwig, M. F. (2020). Dynamic Inefficiency and Fiscal Interventions in an Economy with Land and Transaction Costs.

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Item Permalink: http://hdl.handle.net/21.11116/0000-0005-E12F-9 Version Permalink: http://hdl.handle.net/21.11116/0000-0005-E181-A
Genre: Paper

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 Creators:
Hellwig, Martin F.1, Author              
Affiliations:
1Max Planck Institute for Research on Collective Goods, Max Planck Society, ou_2173688              

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Free keywords: Dynamic inefficiency, fiscal policy, public debt, overlapping-generations models with land, transaction costs, pay-as-you-go retirement provision
 JEL: C15 - Statistical Simulation Methods: General
 JEL: D61 - Allocative Efficiency; Cost–Benefit Analysis
 JEL: E21 - Consumption; Saving; Wealth
 JEL: E62 - Fiscal Policy
 JEL: H63 - Debt; Debt Management; Sovereign Debt
 Abstract: The paper contributes to the discussion on whether real interest rates smaller than real growth rates can be taken as evidence of dynamic inefficiency that calls for fiscal interventions. A seemingly killing objection points to the presence of land, a non-produced durable asset whose value becomes arbitrarily large as interest rates go to zero. Such an asset, it is claimed, can accommodate any need for a store of value at interest rates above growth rates, so dynamic inefficiency cannot arise. The paper shows that this objection is not robust to the presence of an arbitrarily small per-unit-of-value transaction cost. The paper also gives conditions under which fiscal interventions provide for Pareto improvements even though the interventions themselves are also costly.

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 Dates: 2020-03-13
 Publication Status: Published online
 Pages: -
 Publishing info: Bonn : Max Planck Institute for Research on Collective Goods, Discussion Paper 2020/7
 Table of Contents: -
 Rev. Type: -
 Identifiers: Other: 2020/7
 Degree: -

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