A NOTE ON THE ROBUSTNESS OF THE TOBIN EFFECT IN INCOMPLETE MARKETS

Makoto Saito and Yosuke Takeda ()

Macroeconomic Dynamics, 2006, vol. 10, issue 01, pages 131-143

Abstract: Taking Dutta and Kapur s study (Review of Economic Studies 65, 551 572, 1998) as a case of the Tobin effect, this note investigates the extent to which the Tobin effect persists with the addition of sophisticated financial instruments in incomplete markets. On one hand, after dynamic contracts are introduced to the fullest extent, money demand as a precautionary device is crowded out completely, and there is thus no room for the Tobin effect to persist. On the other hand, the Tobin effect may be strengthened under conditions of coexistence of fiat money and dynamic insurance contracts with limited transfers thanks to relaxed incentive compatibility conditions in a moderately inflationary environment.

Date: 2006

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