Implementing the best steady state with savings in unbacked risky assets

Journal article: This paper shows, in an overlapping generations economy à la Diamond (1965), that when savings in an unbacked asset (e.g. at 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 an absolutely riskless at money and excluding resorting to redistributive scal policies that would allow to attain the rst-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 non-redistributive.

Author(s)

Julio Dávila

Journal
  • Macroeconomic Dynamics
Date of publication
  • 2013
Keywords JEL
E21 E62 H21
Keywords
  • Asset bubble
  • Overlapping generations
  • Taxation of savings
Pages
  • 779-801
Version
  • 1
Volume
  • 17