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Safe Assets, Risky Assets, and Dynamic Inefficiency in Overlapping-Generations Economies

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  • Martin F. Hellwig

    (Max Planck Institute for Research on Collective Goods)

Abstract

The paper gives conditions for dynamic inefficiency of laissez-faire allocations in an overlapping-generations model with safe and risky assets. If the rate of population growth is certain, the conditions given depend only on how the rate of return on safe assets compares to the growth rate. If no safe assets are held, the implicit relative price for non-contingent intertemporal exchanges takes the place of the safe rate of return. Returns on risky assets do not enter the comparison. The conclusion holds regardless of whether welfare assessments are made from an interim perspective, taking account of the information that people have, or from an ex ante perspective. If a laissez-faire allocation is dynamically inefficient, a Pareto improvement can be implemented by a suitable fiscal policy intervention, which includes specific taxes or subsidies that neutralize incentive effects on risky investments and the price effects they induce.

Suggested Citation

  • Martin F. Hellwig, 2021. "Safe Assets, Risky Assets, and Dynamic Inefficiency in Overlapping-Generations Economies," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2021_10, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2021_10
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    References listed on IDEAS

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    Cited by:

    1. Gersbach, Hans & Rochet, Jean Charles & von Thadden, Ernst-Ludwig, 2022. "Public Debt and the Balance Sheet of the Private Sector," CEPR Discussion Papers 17529, C.E.P.R. Discussion Papers.
    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. Gaetano Bloise & Pietro Reichlin, 2023. "Low safe interest rates: A case for dynamic inefficiency?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 633-656, December.

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    More about this item

    Keywords

    Dynamic Inefficiency; overlapping-generations models; safe asset shortages; macro risk allocation; public debt;
    All these keywords.

    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
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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