Fiscal Policies, Inflation and Capital Formation

Martin Feldstein

No 275, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Three ways of averting "excess saving" have been emphasized in both theory and practice. The thrust of the Keynesian prescription was to increase the government deficit to provide demand for the resources that would not otherwise be used for either consumption or investment. In this way, aggregate demand would be maintained by substituting public consumption for private consumption. A second alternative prescription was to reduce the private saving rate. Early Keynesians like Seymour Harris saw the new Social Security program as an effective way to reduce aggregate saving. The third type of policy, developed by JamesTobin, relies on increasing the rate of inflation and making money less attractive relative to real capital. In Tobin's analysis, the resulting increase in capital intensity offsets the higher saving rate and therefore maintains aggregate demand. This paper will examine ways of increasing capital intensity without raising the rate of inflation. The analysis will also show why, contrary to Tobin's conclusion, a higher rate of inflation may not succeed in increasing investors' willingness to hold real capital.

Date: 1978-08
Note: PE
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Published as Feldstein, Martin. "Fiscal Policies, Inflation, and Capital Formation." The American Economic Review, Vol. 70, No. 4, (September 1980), pp. 636-650.
Published as Fiscal Policies, Inflation, and Capital Formation , Martin Feldstein. in Inflation, Tax Rules, and Capital Formation , Feldstein. 1983

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