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Dynamic inefficiency and fiscal interventions in an economy with land and transaction costs

Author

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  • Hellwig Martin F.

    (64376 Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, D - 53113 Bonn, Germany)

Abstract

The paper contributes to the discussion on whether real interest rates below real growth rates can be taken as evidence of dynamic inefficiency so that some fiscal intervention may be called for. A seemingly killing objection points to land, a non-produced durable asset in positive supply, as a reason why dynamic inefficiency can be ruled out. If real interest rates were expected to be below real growth rates forever, the value of land would be unbounded, which is incompatible with equilibrium. The paper shows that this objection is not robust to the presence of an arbitrarily small per-unit-of-value transaction cost. The paper also specifies fiscal interventions that provide for Pareto improvements even though they involve a resource cost. For the debate about public debt policy, the land argument is a red herring because it is incompatible with the presence of fiat money and debt denominated in units of fiat money.

Suggested Citation

  • Hellwig Martin F., 2022. "Dynamic inefficiency and fiscal interventions in an economy with land and transaction costs," German Economic Review, De Gruyter, vol. 23(1), pages 21-60, February.
    • Handle: RePEc:bpj:germec:v:23:y:2022:i:1:p:21-60:n:2
    DOI: 10.1515/ger-2020-0110
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    Cited by:

    1. Hellwig, Martin F., 2020. "Property taxes and dynamic inefficiency: A correction of a “correction”," Economics Letters, Elsevier, vol. 197(C).
    2. Martin Hellwig, 2021. "Der Zinssatz ist kein Preis [The Interest Rate Should not be Interpreted as a Price]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(11), pages 862-869, November.
    3. Martin F. Hellwig, 2024. "Dynamic efficiency and inefficiency in a class of overlapping-generations economies with multiple assets," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2024_08, Max Planck Institute for Behavioral Economics.

    More about this item

    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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