Working Paper: CEPR ID: DP1108
Authors: Tullio Jappelli; Marco Pagano
Abstract: We analyse the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the economy is dynamically inefficient. But if it is dynamically efficient, some degree of financial repression is optimal in the steady state, even though it hurts some generations in the transition. In an open economy with capital mobility, financial repression of domestic households is never optimal at the national level; but generalized capital mobility leads to an inefficiently low steady-state supply of saving at the world level. With endogenous technical progress, financial repression may increase welfare even along the transition path, thus leading to a Pareto improvement. In this case the optimal degree of financial repression increases as the economy grows.
Keywords: saving; liquidity constraints; welfare
JEL Codes: E21; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints (E41) | welfare (I38) |
| liquidity constraints (E41) | consumer choices (D10) |
| liquidity constraints (E41) | capital accumulation (E22) |
| financial repression (G28) | welfare (I38) |
| government spending (H59) | financial repression (G28) |
| liquidity constraints (E41) | saving decisions (D14) |
| liquidity constraints (E41) | investment decisions (G11) |