Low Safe Rates: A case for Dynamic Inefficiency?

Gaetano Bloise and Pietro Reichlin

No 17651, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We reexamine the tests for dynamic inefficiency in productive overlapping-generations economies with stochastic growth. The size of real, long-term, safe interest rates relative to average GDP growth is an inconclusive test for dynamic inefficiency. A more accurate test should take into account the correlation between growth and the marginal utility of wealth. This typically restricts the room for inefficiency and welfare-improving policies. We also distinguish capital overaccumulation from an inefficient distribution of consumption risk. The refined test for capital overaccumulation is rather stringent: capital is not overaccumulated if the net dividend remains positive with some probability, as opposed to always, as in the original Abel et al. (1989)'s formulation

Keywords: Interest; rates (search for similar items in EconPapers)
JEL-codes: D60 E21 E62 G1 H2 H21 (search for similar items in EconPapers)
Date: 2022-11
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17651 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17651

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17651

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().