EconPapers    
Economics at your fingertips  
 

Secular Stagnation, Rational Bubbles, and Fiscal Policy

C. N. Teulings ()

No 1628, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubbles can implement an efficient allocation. This paper considers a world where r fluctuates over time due to shocks to the marginal productivity of capitol. Then, bubbles further efficiency, though they cannot implement first best. While bubbles can only be sustained when r = g in a deterministic economy, r > g "on average" in a stochastic economy. Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubble economy, fiscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while fiscal policy implements intragenerational transfers. Hence, while bubbles and fiscal policy are perfect substitutes in the deterministic economy, fiscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic inefficiency should lead to a higher sovereign debt.

Keywords: Rational bubbles; Fiscal policy; Secular stagnation (search for similar items in EconPapers)
JEL-codes: E44 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2016-07
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.centreformacroeconomics.ac.uk/Discussio ... MDP2016-28-Paper.pdf (application/pdf)

Related works:
Working Paper: Secular Stagnation, Rational Bubbles, and Fiscal Policy (2016) Downloads
Working Paper: Secular Stagnation, Rational Bubbles and Fiscal Policy (2016) Downloads
Working Paper: Secular Stagnation, Rational Bubbles, and Fiscal Policy (2016) Downloads
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:cfm:wpaper:1628

Access Statistics for this paper

More papers in Discussion Papers from Centre for Macroeconomics (CFM) Contact information at EDIRC.
Bibliographic data for series maintained by Martin Hannon ().

 
Page updated 2019-10-12
Handle: RePEc:cfm:wpaper:1628