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Precautionary Saving, Government Policy and Growth in a Stochastic Cash-in-Advance Economy


  • Honkapohja, Seppo
  • Lempinen, Urho


This paper uses a stochastic growth model with consumption, saving, portfolio choice between real capital and government bonds and money holding as a cash-in-advance constraint. It shows that money supply changes due to government expenditure changes or open market operations are never superneutral. In contrast, income tax changes only have nominal effects. Furthermore, Ricardian neutrality does not hold in the model. The real effects are weakened and nominal ones strengthened by increased risk aversion resulting in increased precautionary saving.

Suggested Citation

  • Honkapohja, Seppo & Lempinen, Urho, 1991. "Precautionary Saving, Government Policy and Growth in a Stochastic Cash-in-Advance Economy," CEPR Discussion Papers 529, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:529

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    References listed on IDEAS

    1. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-1175, September.
    4. Baron, David P., 1985. "Regulation of prices and pollution under incomplete information," Journal of Public Economics, Elsevier, vol. 28(2), pages 211-231, November.
    5. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    6. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
    7. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
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