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Secular Stagnation, Rational Bubbles and Fiscal Policy

C. N. Teulings ()

No 11149, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is well known that rational bubbles can be sustained in a dynamically ineffcient economy, where the return to capital r is below the growth rate g. However, empirical evidence suggests that modern economies are most of the time on an efficient path with r > g. This paper shows that rational bubbles can be sustained when r g "on average". Fiscal policy can enhance both welfare and financial stability. Contrary to common wisdom, trade in bubbly assets implements inter generational transfers, while fiscal policy is needed for theimplementation of intragenerational transfers. Finally, we show that in an economy with risk aversion, bubbles may emerge even when there exists an asset with a risk-free return growing at rate g.

Keywords: bubbles; dynamic efficiency; Fiscal policy; macro; 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-mac
Date: 2016-03
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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
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