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Incomplete Financial Markets, Irreversibility of Investments and Fiscal and Monetary Policy Instruments

Incomplete Financial Markets, Irreversibility of Investments and Fiscal and Monetary Policy... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Japanese Economic Review Springer Journals

Incomplete Financial Markets, Irreversibility of Investments and Fiscal and Monetary Policy Instruments

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References (23)

Publisher
Springer Journals
Copyright
2008 Japanese Economic Association
ISSN
1352-4739
eISSN
1468-5876
DOI
10.1111/j.1468-5876.2008.00457.x
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

The Japanese Economic ReviewSpringer Journals

Published: Sep 1, 2009

Keywords: economics, general; microeconomics; macroeconomics/monetary economics//financial economics; econometrics; development economics; economic history

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