Optimal Financial Repression in an Overlapping Generations Model with Endogenous Labor

M. Mamedly and O. Norkina
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M. Mamedly: Bank of Russia, Department of Research And Forecasting, Moscow, Russia
O. Norkina: National Research University Higher School of Economics, International Laboratory for Macroeconomic Analysis, Moscow, Russia

Journal of the New Economic Association, 2019, vol. 43, issue 3, 34-56

Abstract: One of the key issues of optimal fiscal policy is a choice of public goods financing program. Financial repression is commonly used by governments as an implicit taxation of financial sector along with explicit labor and capital taxes. In this paper we consider the optimal choice of benevolent government in an overlapping generations' model with an endogenous labor supply and defined contribution pension system. Financial repression is modeled as an artificial increase in demand on government bonds of the pension fund with the reduced rate of return. The optimal choice depends on the population growth: when the growth is negative the government does not resort to the financial repression, and public good is financed by the labor tax revenues. When the population growth is positive optimal choice of the government includes financial repression coupled with capital tax. In this case the interest rate on the government debt is -1. Stronger financial repression leads to the decrease in pension savings, substituted by voluntary savings, which leads to higher capital and output per unit of labor.

Keywords: financial repression; optimal taxation; overlapping generations; benevolent government; labor tax; capital tax (search for similar items in EconPapers)
JEL-codes: E61 E62 G28 H21 H55 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:nea:journl:y:2019:i:43:p:34-56

DOI: 10.31737/2221-2264-2019-43-3-2

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