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dc.contributor.authorTeulings, C. N.
dc.date.accessioned2016-08-11T15:25:12Z
dc.date.available2016-08-11T15:25:12Z
dc.date.issued2016-07-27
dc.identifier.otherCWPE1642
dc.identifier.urihttps://www.repository.cam.ac.uk/handle/1810/257143
dc.description.abstractIt 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 capital. 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 bubbly 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.en
dc.publisherFaculty of Economics
dc.relation.ispartofseriesCambridge Working Papers in Economics
dc.rightsAll Rights Reserveden
dc.rights.urihttps://www.rioxx.net/licenses/all-rights-reserved/en
dc.subjectrational bubbles
dc.subjectfiscal policy
dc.subjectSecular Stagnation
dc.titleSecular Stagnation, Rational Bubbles, and Fiscal Policy
dc.typeWorking Paper
dc.identifier.doi10.17863/CAM.1071


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