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r Minus g

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  • Robert Barro

    (Harvard University)

Abstract

In long-term data, the dynamic efficiency condition, r>g, holds when g is the growth rate of GDP if r is the return on equity, r^e, but not if r is the risk-free rate, r^f. This pattern accords with a disaster-risk model that fits observed equity premia. The equilibrium may feature r^f g is required for dynamic efficiency, implied by the model, and consistent with data. With complete markets, the representative consumer's transversality condition translates into a no-Ponzi constraint on the public debt that the government can issue asymptotically. Therefore, fiscal changes do not affect the net wealth of the representative consumer, and Ricardian Equivalence holds. This result also holds in an example with incomplete markets where individual ownership of capital stocks cannot be fully diversified. (Copyright: Elsevier)

Suggested Citation

  • Robert Barro, 2023. "r Minus g," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 1-17, April.
    • Handle: RePEc:red:issued:22-139
    DOI: 10.1016/j.red.2022.10.001
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    Cited by:

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    2. Nezih Guner & Martin Lopez-Daneri & Gustavo Ventura, 2023. "The Looming Fiscal Reckoning: Tax Distortions, Top Earners, and Revenues," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 50, pages 146-170, October.
    3. Eduardo Levy Yeyati & Federico Sturzenegger, 2023. "A balance‐sheet approach to fiscal sustainability," Fiscal Studies, John Wiley & Sons, vol. 44(1), pages 61-84, March.
    4. Stefan Fetzer & Stefan Moog, 2021. "Indicators for Measuring Intergenerational Fairness of Social Security Systems—The Case of the German Social Health Insurance," Sustainability, MDPI, vol. 13(10), pages 1-18, May.
    5. Christian Breuer, 2020. "Goverment Debt Post COVID-19: Back To Golden Rules," Chemnitz Economic Papers 041, Department of Economics, Chemnitz University of Technology, revised Feb 2020.
    6. Gollier, Christian & van der Ploeg, Frederick & Zheng, Jiakun, 2023. "The discounting premium puzzle: Survey evidence from professional economists," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).
    7. Christian Breuer, 2021. "Staatsverschuldung nach Corona: Rückkehr zur Goldenen Regel [Public debt after Corona: Return to the Golden Rule]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(1), pages 2-3, January.
    8. Jean-Baptiste Michau, 2022. "The Trilemma for Low Interest Rate Macroeconomics," Working Papers 2022-19, Center for Research in Economics and Statistics.
    9. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    10. Kersten Kellermann & Carsten-Henning Schlag, 2021. "Überakkumulation oder Investitionslücke? [Over Accumulation or Investment Gap?]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(12), pages 964-970, December.
    11. Kuvshinov, Dmitry & Zimmermann, Kaspar, 2020. "The Expected Return on Risky Assets: International Long-run Evidence," CEPR Discussion Papers 15610, C.E.P.R. Discussion Papers.
    12. Vadim Elenev & Tim Landvoigt & Patrick J. Shultz & Stijn Van Nieuwerburgh, 2021. "Can Monetary Policy Create Fiscal Capacity?," NBER Working Papers 29129, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Dynamic efficiency; Disaster risk; Economic growth; Public debt;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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