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IMPLEMENTING THE BEST STEADY STATE WITH SAVINGS IN UNBACKED RISKY ASSETS

Published online by Cambridge University Press:  06 March 2012

Julio Dávila
Julio Dávila*
Affiliation:
Université catholique de Louvain, CORE and Paris School of Economics, Université Paris 1—Panthéon-Sorbonne, CNRS, France
*
Address correspondence to: Julio Dávila, CORE, Voie du Roman Pays 34, L1.03.01, B-1348 Louvain-la-Neuve, Belgium; e-mail: [email protected].
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Abstract

This paper shows, in an overlapping-generations economy à la Diamond [American Economic Review 55, 1126–1150 (1965)], that when savings in an unbacked asset (e.g., fiat money) bear some risk of becoming suddenly worthless, the market does not implement the best steady state attainable with that asset. Nonetheless, in the absence of absolutely riskless fiat money and excluding resorting to redistributive fiscal policies that would make it possible to attain the first-best steady state, this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. The policy is, at the steady state, balanced every period and nonredistributive.

Keywords

Taxation of SavingsOverlapping GenerationsAsset Bubble
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 4 , June 2013 , pp. 779 - 801
Copyright
Copyright © Cambridge University Press 2012 

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References

REFERENCES

Dávila, Julio (2008) The Taxation of Capital Returns in Overlapping Generations Economies without Financial Assets. CORE Discussion Paper 2008/75.Google Scholar
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Samuelson, Paul A. (1958) An exact consumption-loan model of interest with or without the social contrivance of money. Journal of Political Economy 66, 467–482.CrossRefGoogle Scholar
Tirole, Jean (1985) Asset bubbles and overlapping generations economies. Econometrica 53, 1499–1528CrossRefGoogle Scholar
Weil, Philipppe (1987) Confidence and the real value of money in an overlapping generations economy. Quarterly Journal of Economics 107, 29–42.Google Scholar