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Fiscal Policies, Inflation, and Capital Formation

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  • Feldstein, Martin

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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 70 (1980)
Issue (Month): 4 (September)
Pages: 636-50

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Handle: RePEc:aea:aecrev:v:70:y:1980:i:4:p:636-50

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Cited by:
  1. Feldstein, Martin, 1980. "Inflation, tax rules and the stock market," Journal of Monetary Economics, Elsevier, vol. 6(3), pages 309-331, July.
  2. Martin Feldstein, 1978. "The Effect of Inflation on the Prices of Land And Gold," NBER Working Papers 0296, National Bureau of Economic Research, Inc.

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