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

Martin Hellwig

No 2020_07, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: In the discussion 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 land, a non-produced durable asset in positive supply, as a reason why dynamic inefficiency can be ruled out. If real interest rates were expected to be below real growth rates forever, the value of land would be unbounded, which is incompatible with equilibrium. 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 specifies fiscal interventions that provide for Pareto improvements even though they involve a resource cost. For the debate about public debt policy, the land argument is a red herring because it is incompatible with the presence of fiat money and debt denominated in units of fiat money.

Keywords: Dynamic inefficiency; fiscal policy; public debt; overlapping-generations models with land; transaction costs; pay-as-you-go retirement provision (search for similar items in EconPapers)
JEL-codes: D15 D61 E21 E62 H63 (search for similar items in EconPapers)
Date: 2020-03, Revised 2021-05-17
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Dynamic inefficiency and fiscal interventions in an economy with land and transaction costs (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2020_07

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