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Incomplete Financial Markets, Irreversibility Of Investments And Fiscal And Monetary Policy Instruments

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  • KENJI MIYAZAKI
  • KIYOHIKO G. NISHIMURA
  • MAKOTO SAITO

Abstract

In this paper, we analyse the use of fiscal and monetary instruments to improve long‐run welfare when productive investment is irreversible and uncollateralizable and there is no insurance. Only fiat money or government issued bonds provide self‐insurance. We demonstrate that an increase in precautionary savings reduces irreversible productive investment. Hence, subsidies to promote productive but irreversible investment should be financed in such a way that they do not reduce insurance capability. When lump‐sum subsidies are high, a consumption tax is likely to be more redistributive and thus more consumption smoothing than are the other sets of instruments analysed in our model.

Suggested Citation

  • Kenji Miyazaki & Kiyohiko G. Nishimura & Makoto Saito, 2009. "Incomplete Financial Markets, Irreversibility Of Investments And Fiscal And Monetary Policy Instruments," The Japanese Economic Review, Japanese Economic Association, vol. 60(3), pages 271-300, September.
    • Handle: RePEc:bla:jecrev:v:60:y:2009:i:3:p:271-300
    DOI: 10.1111/j.1468-5876.2008.00457.x
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    References listed on IDEAS

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