Limited asset market participation and fiscal sustainability

Noritaka Maebayashi () and Jumpei Tanaka ()
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Noritaka Maebayashi: The University of Kitakyushu
Jumpei Tanaka: The University of Kitakyushu

Journal of Economics, 2022, vol. 137, issue 1, No 1, 31 pages

Abstract: Abstract We examine the implications of limited stock market participation (the stylized fact that only a fraction of households directly own stocks) for economic growth and, in particular, fiscal sustainability. Constructing an overlapping generations model where (1) individuals can choose between two types of savings (i.e., physical capital with high returns but costly to hold and bank deposits with low returns but no costs), and (2) banks invest part of their total deposits in physical capital and use the rest to underwrite government debt, we show the following. First, an increase in the average level of an individual’s financial literacy worsens fiscal sustainability while promoting economic growth under plausible parameter values. Second, if banks decrease (resp. increase) the number of government bonds they underwrite, fiscal sustainability improves (resp. worsens) when the average financial literacy of individuals is relatively low.

Keywords: Limited asset market participation; Financial literacy; Fiscal sustainability; Public debt; Overlapping generations; Endogenous growth (search for similar items in EconPapers)
JEL-codes: E13 G11 H63 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:137:y:2022:i:1:d:10.1007_s00712-022-00776-w

DOI: 10.1007/s00712-022-00776-w

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