Dynamic inefficiency and fiscal interventions in an economy with land and transaction costs

Martin Hellwig

German Economic Review, 2022, vol. 23, issue 1, 21-60

Abstract: The paper contributes to the discussion on whether real interest rates below real growth rates can be taken as evidence of dynamic inefficiency so that some fiscal intervention may be called for. 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: 2022
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Citations: View citations in EconPapers (1)

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Working Paper: Dynamic Inefficiency and Fiscal Interventions in an Economy with Land and Transaction Costs (2021)
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DOI: 10.1515/ger-2020-0110

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