Implementing the best steady state with savings in unbacked risky assets

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2 Citations (Scopus)

Abstract

This paper shows, in an overlapping-generations economy à la Diamond [American Economic Review 55, 1126-1150 (1965)], that when savings in an unbacked asset (e.g., fiat money) bear some risk of becoming suddenly worthless, the market does not implement the best steady state attainable with that asset. Nonetheless, in the absence of absolutely riskless fiat money and excluding resorting to redistributive fiscal policies that would make it possible to attain the first-best steady state, this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. The policy is, at the steady state, balanced every period and nonredistributive.

Original languageEnglish
Pages (from-to)779-801
Number of pages23
JournalMacroeconomic Dynamics
Volume17
Issue number4
DOIs
Publication statusPublished - Jun 2013
Externally publishedYes

Keywords

  • Asset Bubble
  • Overlapping Generations
  • Taxation of Savings

ASJC Scopus subject areas

  • Economics and Econometrics

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